Business Law/Organizational Forms - Essay Example

BUSINESS LAW ………………. College/ …………… ……………………. Introduction Selecting the appropriate form of business organization is as critical as deciding on whether to start a business or not. There are different forms of business organizations such as sole proprietorship, partnership, corporation, limited liability company etc. While choosing one of such forms, the entrepreneur should consider factors such as number of owners, tax considerations, limited liability, public or private, ownership transfer, management, organizing expenditure etc. This paper presents a brief report on various forms of business organizations describing each of them in relation to the above mentioned factors. Sole Proprietorship In the US, most of the businesses are owned and operated by sole proprietors. Sole proprietorship is, in simple term, one man business. The whole business is operated, owned and controlled by a single man. He is thus the entrepreneur and the sole proprietor (Goldman and Sigismond, 2010, p. 430). This form of the business organization is the easiest form to be started since there are relatively less formalities. Though there are no much legal restrictions to start a business, anyone who wants to start his own sole trading business may need to comply with rules and regulations that apply to business in general. In sole proprietorship, the liability of the owner is unlimited because the owner will be legally bound to pay all financial indebtedness regardless of the total value of the capital he invested in the business. One of the most important advantages of this form of business is that the owner is not required to share any part of the profit he earned. The owner has relatively fuller control on the business and moreover it can easily be transferred to another form of business such as partnership. General Partnership Partnership is a business form that is owned by two or more people and is organized on the basis of contracts that the partners agreed up on. This is not an incorporated business form. Each partner in the partnership form of business shares profits, losses, works, decision making etc (Dlabay, Scott and Scott, 2010, p. 116). There are commonly two types of partnerships, namely, general and limited partnerships. The owners in a general partnership are partners, but each of them is equally liable for partnership liabilities. When two or more people bring newer business idea, find a newer opportunity for business and form partnership without further thinking about liability and incorporating the business in to the form of ‘limited liability’. This is how a general partnership firm comes in to existence. A general partner is one who assumes full or shared responsibilities for operating the business. These partners are actively involving in day-to-day business operations. Each general partner can enter in to contract on behalf of another partner. Thus, a general partnership is a partnership business form in which the business sis co-owned by both or all the partners who are equally liable for everything the business does (Pride, Hughes and Kapoor, 2011, p. 112). A general partnership is characterized by unlimited liability and its partners will be subject to pay self-employment taxes. Limited Partnership Limited partnership is more akin to a corporate business since the liability of the limited partners are limited. The limited partnership is a business that is co-owned by general partners who manage the business and limited partners who invest the money. As Pride, Hughes and Kapoor (2011, p. 112) noted, limited partner is one who invests money in a business and he doesn’t possess responsibility for managing, controlling or operating the business and is not liable for liability for losses above his investment in the business. He is, similar to shareholders in the company, liable only for the money he invested in the business. A limited partnership form may comprise of both general and limited partners. In limited partnership, limited partners bring capital to the business and general partners operate and run the business. As far as profit retention is concerned, limited partners share part of the profit according to the proportion of capital they invested in. This form of business, as compared to that of a company, is more convenient to set up except that partners have to share both profits as well as losses and decisions are taken jointly. C-Corporation A corporate structure of the business form is more complicated than the organization structure of sole proprietorship or partnership. A corporation is different from other forms because it enjoys limited liability, separate legal entity, perpetual succession etc. there are two terms in corporation, they are C-Corporation and S-Corporation. These are detailed below: A C-Corporation is an alternative name for regular for-profit corporation, that will be taxed under the normal corporate income tax rules. The letter C in C-Corporation denotes the subchapter C of the Internal Revenue Code and is normally used to distinguish regular form of corporations from S-Corporations. A C-Corporation is required to abide rules and regulations related to corporate taxes (Mancuso, 2011, p. 57). C-Corporation will be considered as a separate tax entity and therefore it must file and pay income taxes on its own tax returns. The main characteristics of C-Corporation are: Shareholders and the owners and they enjoy limited liability, The business enjoys perpetual succession and separate legal entity, Gains advantages of ease of raising capital and specialized management. Gains the disadvantages of increased expenditure for formation, double taxation, lack of secrecy etc S-Corporations A S-Corporation is a corporation that its income is taxed only as the personal income of its shareholders. More specifically, an S-Corporation is taxed as though it were a partnership. The corporate returns and profits get ‘pass through’ the business and thus they are reported as owners’ personal income tax returns (Pride, Hughes and Kapoor, 2011, p. 122). A firm can qualify the status of S-Corporation only if it meets the following criteria: Maximum of 100 stockholders are allowed. Stockholders must be individuals, estates and trusts, There can be only one type of outstanding stocks, The firm must be a domestic corporation, and All stockholders must agree to the decision to form as S-corporation (Pride, Hughes and Kapoor, 2011, p. 122). A C-Corporation can be converted to a S-Corporation if it can fulfill the above mentioned criteria. When it becomes S-Corporation, the main change is that it becomes ‘pass through’ entity because its income, losses and properties etc pass through to corporation’s shareholders in the proportion of their ownership share. Limited Liability Company A limited liability company is another business form that combines the advantages of corporations as well as partnership and avoids some of the restrictions and disadvantages of both these forms. For instance, Limited Liability Company with at least two members are taxed like a partnership, and avoids double-taxing which is a disadvantage of corporation. A limited liability company is not subject to be taxed twice. Similarly, limited liability companies with just one member is taxed like a sole proprietorship. Limited Liability Company is almost like a corporation since it gains the advantages of limited liability. This form of business also provides more management flexibility as compared with that of corporations. This form of business is designed to provide limited liability features of a corporation and the tax advantage and operational efficiency of sole proprietorship and partnership. Conclusion This report has addressed the salient features of each of different types of business forms including sole proprietorship, partnership, corporation, S-Corporation, C-corporation and Limited liability company. Selecting any of these business forms largely depend on factors such as limited liability, convenience, control, easiness to form, profit and loss sharing etc. Memorandum From the given scenario, the business was so far operating as a sole proprietor, but needs to change since the owner thinks to expand the business. He is planning to expand the manufacturing business both geographically and by adding second factory in another state. For this purpose, selecting Limited Liability Company will be a better option since this can help the owner receive corporation’s protection from personal liability for business debts and tax structure of partnership and sole proprietorship. One of the most disadvantage of sole trading that this owner so far has been experiencing was unlimited liability. In sole trading business, the sole proprietor is liable for all debts of the business, regardless of whether his capital covers it or not. In cases of business debts, sole proprietor is legally bound to pay all the debts of his business. By converting his business to Limited Liability Business, he and newly joined members will enjoy limited liability. Limited liability feature makes Limited Liability Company akin to a corporation and gives it ‘separate legal structure in front of legal system because owner’s personal properties or assets are considered different from company. Another important aspect is operational flexibility that the owner has been enjoying in sole proprietorship. A sole trader has relatively greater convenience in operating, running and controlling the business, because he is the superior to take decision and he can take decisions of his own. He thus enjoys operational flexibility. He will not be interfered in taking decision, working in business and sharing of profit or losses etc. A Limited Liability Company can be formed even with just one member and this is how he can benefit as working as sole proprietor. The owner is planning to expand the business and for this purpose he needs to raise capital. A limited liability company may not be able to issue shares to the public, but his business seems to be more professional and he can obtain more funds from other financial sources such as leasing, bank and mortgage loans, hire purchasing etc. Being a member in the Limited Liability Company, the owner will be as an agent of the company for all the purposes of its business affairs. This memorandum suggests the owner that he may choose Limited Liability Company for expanding his present sole proprietorship, because Limited liability Company has the advantages of: Limited liability status, Taxation of business profits and losses at individual rates as taxed in the case of sole proprietorship, Flexibility in managing the business, and Flexible distribution of profits and losses. References Dlabay, L, Scott, J and Scott, J.C, 2010, International Business, Fourth Edition, Cengage Learning Goldman, A.J and Sigismond, W.D, 2010, Business Law: Principles and Practices, Eighth Edition, Cengage Learning Mancuso, A, 2011, Nolos Quick LLC: All You Need to Know About Limited Liability Companies, Sixth Edition, Nolo Pride, W.M, Hughes, R.J and Kapoor, J.R, 2011, Business, Eleventh Edition, Cengage Learning Read More