Sole Proprietorship Business and Limited Partnership - Essay Example

Organizational Forms Task A Every business organization, in the modern era, can be identified to face the challenge of expansion towards gaining competitive advantages. Hence, it can be regarded as a key decision for any business to use a suitable organizational form which is appropriate in relation to the aspects such as liability, income tax, longevity, control, profit retention, location and convenience/burden. The report will describe six major business forms by considering the advantages and disadvantages on the basis of above aspects. Sole Proprietorship Sole proprietorship is considered as the easiest form of organizational structure (Small Business Development Corporation, 2012). The major characteristics of sole proprietorship are as follows: Liability: Liability is the biggest disadvantage in sole proprietorship organizational form. In sole proprietorships, if the business suffers huge amount of dues which cannot be recovered from revenue, the owner will be personally liable for paying the entire amount. On the flip side, if proprietor possesses unpaid dues, the creditors can even realize those from the business assets (McGuire, Woods & McLean, n.d.). Income tax: Sole proprietorship business is a taxable unit. In this business form, there is little opportunity for tax planning, as the owner is completely liable to pay all the taxes derived through income (McGuire, Woods & McLean, n.d.). Longevity or continuity of the organization: The longevity of sole proprietorship business depends largely on the existence of its owner (Beatty, Samuelson & Bredeson, 2012). Control: In sole proprietorship, the business owner has the entire control over the resources and business decisions which is a significant advantage of sole proprietorship (AllBusiness, 2007). Profit retention: The other advantage of sole proprietorship business is that it allows the business owner to enjoy complete profit retention (McGuire, Woods & McLean, n.d.). Location: The sole proprietorship business needs to get registered with the location i.e. the place where the business intends to operate its functions. Sole proprietorship necessitates gaining permits or licenses from the state government (McGuire, Woods & McLean, n.d.). Convenience or burden: Sole proprietorship business is quite easy to set-up with minimum capital; however, it significantly depends on the financial ability of the proprietor (McGuire, Woods & McLean, n.d.). General Partnership General partnership is the second type of organizational form which denotes business relationship between individuals forming independent organization through mutual contracts. Liability: Liability is an advantage in general partnership because each business associates are mutually and individually responsible for every facet of the business including profit/loss or major decisions (McGuire, Woods & McLean, n.d.). Income taxes: Similar to sole proprietorship, general partnership organizational form has a single level of taxation. This type of business does not fall under the taxable unit, rather it is considered as a tax reporting unit (McGuire, Woods & McLean, n.d.). Longevity or continuity of the organization: Longevity is a significant disadvantage of general partnership. There is supposed to be specific time duration for the term of general partnership. The longevity of general partnership depends on the contract. Whenever a partner is discharged from the contract, the other existing partners can take over the vacant place or they can even decide to wind-up the complete business (McGuire, Woods & McLean, n.d.). Control: Each business associates possess equal level of control on business decisions (McGuire, Woods & McLean, n.d.). Profit retention: Business associates share the gross profits in between themselves and are taxed independently (McGuire, Woods & McLean, n.d.). Location: The taxation in general partnership relies on the principal regulations location where revenue has been generated (Beatty, Samuelson & Bredeson, 2012). Convenience or burden: A common burden in general partnership business is the generation of different ideas from different partners which can pose a noteworthy impact on the business relationship. Additionally, in general partnership, each partner is held liable to repay the debts, if the business becomes insolvent. Besides, general partnership also does not require reporting as in the case of C-corporation or S-corporation (Beatty, Samuelson & Bredeson, 2012). Limited Partnership Limited partnership is the other business form which comprises two or more business partners, minimum one general partner and a limited partner. Liability: In limited partnership business, the general partner has infinite obligations, while limited partners have limited obligations towards the business (Beatty, Samuelson & Bredeson, 2012). Income taxes: Limited partnership has the advantages of tax benefits. The taxes are distributed between each partner (Beatty, Samuelson & Bredeson, 2012). Location: The limited partnership business requires registration with the concerned authority in the targeted business location (Beatty, Samuelson & Bredeson, 2012). Control: Control is the other advantage of limited partnership as the general partners deal with regular operations of the business. They are the major decision makers in the organisation whereas the limited partners are basically considered to be the passive investors in the organization having negligible control over the managerial decisions taken (Beatty, Samuelson & Bredeson, 2012). Profit retention: In limited partnership, profits are distributed on the basis of partnership contracts. The profits in the limited partnership business form are not overtaxed. This type of business form can be related with the notion of shareholders. For instance, the limited partners are provided with ‘return on investment’ which is similar to dividend paid to the shareholders (Beatty, Samuelson & Bredeson, 2012). Longevity or continuity of the organization: The continuity in limited partnership relies on the term of contract between partners (Beatty, Samuelson & Bredeson, 2012). Convenience or burden: It is quite difficult to set-up limited partnership business; nevertheless, it does not need to obey all reporting norms as in the case of C-Corporations and S-Corporations. Limited partnership can be considered as a convenience rather than a burden as the limited partners does not have the pressure to control the business related issues and general partners can effectively utilize the money of the investors for the sake of business (Beatty, Samuelson & Bredeson, 2012). C-corporation C-corporation is a kind of legal business unit which provides limited obligations to the shareholders for commercial duties or liabilities while defending shareholder’s private assets. The advantage of C-corporation is that it can legally entice investors for providing financial supports. Besides, corporations allow many owners in the form of shareholders (Beatty, Samuelson & Bredeson, 2012). Liability: Limited liability is a major advantage of C-corporation where the shareholders are not usually responsible for the losses or arrears incurred by the organization. Shareholders only bear the monetary risk in this type of business (Beatty, Samuelson & Bredeson, 2012). Income Taxes: Income tax is a key drawback in C-corporation business form as the revenue is taxed two times. The organization pays taxes on the gross revenue and the shareholders also need to pay taxes on their earnings of dividend (Beatty, Samuelson & Bredeson, 2012). Longevity or continuity of the organization: C-corporation is permanent in nature. Once C-corporation is developed, it can exist forever even after the death or retirement of the pioneer shareholders (Beatty, Samuelson & Bredeson, 2012). Control: C-corporation is run and administered by a board of directors constituting of shareholders with high amount of stake with regard to the business organization. The directors are selected by shareholders to handle all the business activities (Beatty, Samuelson & Bredeson, 2012). Profit retention: Profit retention can be identified as a weakness in the C-corporation business form as the amount of profit distributed is quite less compared to general partnership business owing to the twice imposition of taxes (Beatty, Samuelson & Bredeson, 2012). Location: C-corporation must adhere with the regulations of state for safeguarding the corporate reputation in its prospective location (Beatty, Samuelson & Bredeson, 2012). Convenience or burden: C-corporations have several burdens, rather than convenience. For instance, in this type of business form an annual general meeting, convention of directors, corporate minutes, and shareholder conferences needs to be mandatorily held which significantly delays the decision making process in the organization (Beatty, Samuelson & Bredeson, 2012). S-Corporation S-Corporation is the other type of organizational form which also acts as a legal business unit and provides limited obligations to the shareholders. However, unlike C-corporations, S-corporations enjoy tax benefits of partnership business (Beatty, Samuelson & Bredeson, 2012). Liability: Shareholders in S-corporations are not usually responsible for arrears or losses incurred by the organization. Shareholders only need to bear the monetary risk of the business (Beatty, Samuelson & Bredeson, 2012). Income taxes: S-corporation is not considered as a taxable unit. The major disadvantage of S-corporation is that the owners are charged with taxes even if the profits are reinvested in the business (Beatty, Samuelson & Bredeson, 2012). Longevity or continuity of the organization: Similar to C-corporations, S-corporations are also considered to be permanent in nature. However, in S-corporations, there are certain limitations on the transfer of share according to the regulatory obligations (Beatty, Samuelson & Bredeson, 2012). Control: Similar to C-corporations, S-corporations are also run by a board of directors where the shareholders command the authority to select them (Beatty, Samuelson & Bredeson, 2012) Profit retention: Unlike C-corporation, S-corporation does not entail tax disadvantages. This type of organizational structure is capable of providing fewer taxes retaining increased amounts of profits for the shareholders (Beatty, Samuelson & Bredeson, 2012). Location: Similar to C-corporations, S-corporations also need to comply with the company rules and regulations in its key business location (Beatty, Samuelson & Bredeson, 2012). Convenience or burden: The business decision process in S-corporations is slow as it also needs to be conducted through an annual general meetings and corporate minutes among others. Therefore, in this context, S-corporation can be considered as a burden (Beatty, Samuelson & Bredeson, 2012). Limited Liability Company Limited Liability Company (LLC) is the other legal business unit which provides limited obligations to the possessors. Although LLC is a business unit, it is a kind of independent association (Beatty, Samuelson & Bredeson, 2012). Liability: LLC also provides similar advantages of C-corporations and S-corporations, i.e. providing limited obligations to the members being responsible only for monetary risks (Beatty, Samuelson & Bredeson, 2012). Income taxes: LLC does not need to pay taxes at corporate level, therefore it is also not considered as a tax paying unit. LLC is dependent on self-employment tax and the members pay taxes based on their income. The disadvantage of LLC is that the members require paying taxes even if they do not take profit in a given year (Beatty, Samuelson & Bredeson, 2012). Longevity or continuity of the organization: Usually, LLC can exist forever, but the continuity can vary on the basis of rules of the nation where the company operates its business (Beatty, Samuelson & Bredeson, 2012). Control: LLC is governed by a board of directors with the liberty to form an organizational structure (flat or tall) according to their choices (Beatty, Samuelson & Bredeson, 2012). Profit retention: The profits and losses are distributed among the members in LLC where the pattern of distribution is decided in advance (Beatty, Samuelson & Bredeson, 2012). Convenience or burden: Due to high level of regulatory requirements, the formation of LLC is quite challenging. However, LLC must comply with the reporting requirements such as meetings, and performance fundamentals among others aspects. The major convenience for using this organizational form is that LLC has no private liability without the existence of owners and partners (Commonwealth Educational Media Centre for Asia, n.d.). Location: LLC must comply with the company regulations in the key business locations (Commonwealth Educational Media Centre for Asia, n.d.). Task B Memorandum To: XYZ Business From: Mr. XXX, Designation Date: June 09, 2012 Subject: Organizational Form for Business Expansion Among the various organizational forms, sole proprietorship, general partnership and limited partnership can be considered to be non-corporate in nature while C-corporation, S-corporation and LLC can be considered as the corporate forms of business. The selection of specific organizational form depends on various aspects such as nature of business, objective of the business, required amount of finance, level of business operations, level of control and legal requirements among other factors. Considering these aspects it is recommended that the business should select the LLC form in order to expand. The advantage that the business is likely to derive from LLC structure is that it can provide better protection towards private liability. With LLC, the owners can enjoy the benefits of limited liability and safety towards personal assets. Furthermore, LLC can exist forever varying according to the state policies. Due to involvement of numerous partners the profit in LLC is distributed among the partners that can also reduce the tax burden. LLC is known to have a greater degree of advantage over the C-corporation as it avoids dual taxes. As the company is aiming to expand the market geographically, there will be a requirement for further capital where the LLC for of business will aid to gain support from business partners with respect to additional property or money. Furthermore, in LLC there is no ownership restriction and thus in future the business can even attract foreign investors. Thus, by using the organisational framework of an LLC, the business can gain the advantages of partnership and other forms of corporation, simultaneously minimizing the common drawbacks. References AllBusiness. (2007). Advantages and disadvantages of sole proprietorships. Retrieved from http://www.nytimes.com/allbusiness/AB4113314_primary.html Beatty, J. F., Samuelson, S. S., & Bredeson, D. A. (2012). Business law and the legal environment: Standard edition. United States: Cengage Learning. Commonwealth Educational Media Centre for Asia. (n.d.). Forms of business organization. Retrieved from http://cemca.org/braou/subject02/fobtext.htm McGuire, J. W. B., Woods, B., & McLean, B. (n.d.). Selecting the legal structure for your business. Retrieved from http://archive.sba.gov/idc/groups/public/documents/sba_homepage/pub_mp25txt.txt Small Business Development Corporation, 2012. Sole trader. Retrieved from http://www.smallbusiness.wa.gov.au/sole-trader/ Read More