Which of the following is a disadvantage of converting a partnership into a corporation?

• A. Limited ability to raise capital
• B. Double taxation of corporate earnings
• C. Unlimited liability for owners
• D. Lack of legal entity status

Answer: (B)

Verified step by step guidance

1. Understand the context: A partnership and a corporation are two different business structures. A partnership involves shared ownership and liability among partners, while a corporation is a separate legal entity with distinct advantages and disadvantages.
2. Identify the key disadvantage mentioned in the problem: The question highlights 'double taxation of corporate earnings' as the correct answer. This refers to the fact that corporations are taxed on their profits, and shareholders are taxed again on dividends received, leading to double taxation.
3. Compare the options: Evaluate each option provided in the question. For example, 'Limited ability to raise capital' is not a disadvantage of a corporation, as corporations generally have greater access to capital markets. Similarly, 'Unlimited liability for owners' applies to partnerships, not corporations, as corporations offer limited liability protection. 'Lack of legal entity status' is incorrect because corporations are recognized as separate legal entities.
4. Explain why double taxation is a disadvantage: Double taxation occurs because corporate earnings are taxed at the corporate level, and any dividends distributed to shareholders are taxed again at the individual level. This can reduce the overall profitability for shareholders compared to other business structures like partnerships.
5. Conclude the analysis: Based on the evaluation, the correct disadvantage of converting a partnership into a corporation is 'Double taxation of corporate earnings,' as it directly impacts the financial outcomes for shareholders and is unique to the corporate structure.