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Running head: FORMS OF BUSINESS
FORMS OF BUSINESS
Forms of business
This is a form of business which is owned and run by one person. Formally some define this form of business as “a business owned and controlled by one man even though he may have other people working for him.” (Reed & Cover). Due to ease of starting and less regulations, sole proprietorship is the most common form of business. In most places all that is needed to start a proprietorship is just getting a business license and a permit. Most of the business that in future become large cooperation start out as sole proprietorships.
The owner of the business is fully responsible for all the business debts and receives its legal liabilities. This means that in case the owner has a loan, creditors can look past business assets and move to the proprietors personal assets for payment. All business income is taxed as personal income since there is no distinction between the two. Every asset in the business is owned by the proprietor. A business owner can use a trade name or a business name other than his legal name. The life a proprietorship depends on the owner’s lifespan. Transfer of ownership in a sole proprietorship is complicated because it requires the sale of the entire business to the new owner. The amount of equity that the business can raise is often limited to the owner’s personal wealth. This is major limitation for the business because the owners are unable to pursue new opportunities due to inadequate capital resources. Examples of this form of business are small restaurants, writers or shops (Loewenstein, 2013).
Advantages of sole proprietorship
1. Ease and cost of formation- this is the cheapest business form to start because in most places all one needs is to register the business and get the required permits and you are good to go.
2. All profits from the business go directly to you since you own everything.
3. Capital required the start and run the business is minimal compared to the other business norms.
4. Decision making and operation of the business falls directly under the proprietor. This way the owner is able to influence the performance of his business with flexibility.
5. Proprietorship has some tax advantages like deducting losses from the personal income if the business is doing bad and a lower tax bracket when profits are low.
6. Regulatory burden from the government is generally low compared to the other forms of government.
1. Income from the business is taxable at the personal rate of the proprietor and if the business is very profitable, the tax bracket of the owner could be raised.
2. Unlimited liability- since all business debts are personal debts, the owner could lose everything in case of a debt or a law suit against the business.
3. In case the owner is not available, continuity of the business is difficult. This is a major problem affecting this kind of business as the owner runs every aspect of the business and without them the business is dead.
4. Limited source of financing hence it is difficult to raise capital since the owner is mostly alone, the owner therefore jungles all the work from finance to been a manager.
This is a business that is created as a legal entity by the state and whose assets and liabilities are separate from its owners. There are two main types of corporations; public corporation where the business stock is traded publicly in the stock market and Private Corporation which is owned by a small group of people who run every operation of the corporation. Corporations can own property, borrow money and enter into contracts. A corporation can even be a general partner or a limited partner in a partnership. To form a corporation, one is required to prepare articles of incorporation or a charter. The articles should contain things like the corporation name, its intent life span, the number of shares that can be issued and the business purpose. A set of by laws should also be prepared which show how the corporation will be regulated. In large corporations, the stockholders and the managers are different groups. Stockholders elect board of directors who in turn appoint the managers. An advantages of a corporation are the limited liability for business debts, ease of transferring ownership, and the unlimited life of the business. A big disadvantage of corporations is double taxation. Examples of corporations are companies like apple and general electric.
This is a non-incorporated business that is created between two or more people. In a partnership both owner’s financial assets are combined and put together with those of the business. The profits of the business are shared between the partners according to any legal agreement put in place by the parties. Partnerships made on relatively informal agreement are easy and cheap to form. In a general partnership, each partner has unlimited liability for the business debts. Partnership ends when one of the general partners sells out or dies.
In a limited partnership, one or more partners will run the business operations. The partner will have unlimited liability. The other business partner will not actively participate in the business. The liability of a limited partner is proportional to the contribution that the partner makes in the business. A limited partner’s interest can be sold without dissolving the partnership.
A good example of this partnership is in real estate business. The advantages and disadvantages of a partnership are similar to those of sole proprietorship. The advantages include, equal share of management, assets and profit and it is also fairly easy and inexpensive to start a partnership. Disadvantages include unlimited liability and possible disputes between partners (Crawford et al, 2015)
In this form of ownership, the owners have limited liability, greater credibility in obtaining financial backing, and no double taxation as all profits are taxed directly from the owners as all the profits are passed to them. This way, the corporation pays no tax. The owners fill tax returns on their personal accounts and this is done yearly. S corporation also have a limitation to the number and type of stockholders. In the US, the stockholders have to be resident or citizens. To start an s corporation, one needs to draft and file articles of incorporation, issue stock certificates to the initial shareholders. File the required tax forms and acquired all needed business licenses.
A big advantage of an s corporation over the c corporation is that the income is not taxed at the corporate level. It is only taxed when paid out as salaries or dividends to stockholders hence saving a lot of income. A disadvantage of an s corporation is stock ownership restrictions and more scrutiny from the tax agencies.
Limited liability Company
It is designed to combine the benefits of corporate liability protection with the tax treatment and management flexibility of a partnership. In this form the owner’s personal assets are protected from financial liability and personal liability. However, an owner can be held personally responsible if they intentionally fail to separate personal affairs with business affairs, does something fraudulent or reckless. LLC are established under state rule and the rules governing their establishment are dependent on individual state. LLCs are taxed as individuals, partnerships or corporations. To start an LLC one has to file article of organization with the state. An agreement that spells out each owner’s percentage interest in the business, responsibilities and how profits and losses are to be shared is also required. Some states may require one to publish a notice in the local newspaper that you are creating an LLC.
Single member Limited Liability Company has only has one member. Single member LLCs have less complex partnership tax returns as compared to LLC. In some states there are also some income taxes imposed on the LLCs that are not deducted on individuals.
Advantages of LLC include the flexibility and ease of running the business. A disadvantage is lack of uniformity in the laws governing LLC in different states.
This is a business form in which the owners sell rights of their company name, logo or model to third party operators. To invest in a franchise one must pay an initial fee in order to acquire business rights and training. While the business is operating, the franchisee will be required to pay the franchisor royalties depending on the agreed deal. It could be monthly or annually. The royalties are usually calculated as a percentage of the franchise gross sale. To start a franchise one is required to fill an agreement of franchising. Franchising can be categorized as business format franchising where a franchisee is offered a defined package of deliverables and services and product name franchising (Knepper et al, 2015).
The franchisee might not have much control over running the business as they would have when running their own brand but they benefit a lot by operating under an established brand. Advantage of franchising is it offers important pre-opening support. A disadvantage is that the franchisee is not completely independent. Examples of franchises include Mc Donald’s and Subway.
Limited liability partnership
In this form of partnership in which the partners have limited liability protection. In LLP one partner is not responsible for the other’s misconduct or negligence. All partners take active role in managing operations of the business. LLP is mostly designed for professional services. Partners decide the structure of the business and distribution of profits and losses, mostly through written partnership agreement. Each partner is responsible for paying taxes on their distributive network. LLPs don’t pay income tax but are taxed annually. To register an LLP, two or more partners are required. Partners can be individuals of 18 years and above, a corporate or another LLP. Advantages of this form include; no maximum number of partners and raising and utilization fund depends on partners will. They are also very flexible to operate and run. A big disadvantage is that an LLP can’t raise money from the public.
Loewenstein, M. (2013). “Rationalizing Entity Law; Corporate Law and Alternative Forms of business.” Business Law Today, Dec (2013).
Knepper, W. E., Bailey, D. A., Bowman, K, B., Eblin, R. L.,& Lane, R.S, (2015).Duty of Loyalty (vol. 1) liability of Corporate Officers and Directors.
Crawford, T., Fitzegerald, S. & Gross, M. (2015). Business and Legal Forms of Business. Skyhorse Publishing, Inc…
Different Forms of Doing Business. (2022, Feb 18). Retrieved from https://essaylab.com/essays/different-forms-of-doing-business
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