Electrical Contracting Business as a Sole Proprietorship - Essay Example

?BUSSINESS LAW and Section # of Business Law This paper discusses the advantages and disadvantages associated with setting up an electrical contracting business as a sole proprietorship, a partnership and a corporation. All three types of organizational structures are discussed one by one and areas like ease of creation, liability of owners, tax considerations, and the need for capital etc are covered. Electrical contracting business as a Sole Proprietorship Setting up an electrical contracting business all by yourself as a sole proprietor is a very big risk as you assume all the liability of the business. This means that there is unlimited liability and the owner will be responsible personally to repay any debts that may arise from the business. An electrical contracting business would require large amounts of capital to set up and then run the day to day activities. Such limitless capital would not be available with a single person who plans to open a new business, thus he may resort to borrowing or taking loans from lenders. This too is not a guaranteed way to acquire capital as lenders would be unwilling to invest in a new business controlled by a single person with unlimited liability. They would want the personal assets of the owner to cover their loans so that in case of default in the repayment, the assets might be used to recover the loan provided. Secondly, an electrical contracting business needs sophisticated machinery and constant supervision. A single person will not be able to control and supervise 24/7, causing mismanagement which the competition can take advantage of. However, a sole proprietorship is easy to form and dissolve as it does not include legal formalities for starting and closing a business. Although a business such as an electrical contractor would require a government license giving permission to produce and supply electricity which would require certain conditions to be fulfilled. A sole proprietor does not need to share his profits with anyone and he pays minimum income tax as he is not a partnership or a corporation which pay a large proportion of their profits in tax. Electrical contracting business as a Partnership An electrical contracting business being set up as a partnership means ownership is shared between 2 to 20 people. This means that the business will have greater capital and credit resources. A partnership is governed by the law and follows a written document known as the partnership agreement. This document contains all the provisions necessary for smooth running of the business for example managerial duties, share of profits etc. A partnership too can be formed relatively easily as compared to a company. Forming a partnership for conducting an electrical contracting service would require a government license. This license can be achieved relatively easily as compared to sole proprietor business. A partnership consists of two or more thus each person can utilize their managerial skills and benefit the business. For example a partner who is an electrical engineer can work on the machines while another partner who is an accountant can manage the accounts of the business and ensure smooth running. A partnership means the risk of the business is spread over the numerous partners thus one person does not have to take the burden. However, a partnership has unlimited liability as well. This means that all the personal assets of the partners are at risk and a bad decision by one partner can result in loss for all the partners. Being a partnership there is still a limit to the amount of capital that can be acquired thus the business has a limitation on the size. Lastly, a partnership will be subjected to large amounts of taxes under the law. A partnership can acquire several types of tax id numbers, e.g. A Federal EIN Number - The Federal Tax Identification Number is used to identify a business entity and is required for employers and corporations as well as partnerships. A State Sales Tax Id - Sales tax id number or sales tax exemption certificate is a legal document issued by the state. This certificate of authority gives your business the authority to collect the required sales and use taxes. Electrical contracting business as a corporation Setting up an electrical contracting business as a corporation is the most difficult procedure of all. This requires the corporation to be registered with the registrar and complete legal formalities and documents such as the article of association and the memorandum of association and obtain a license. People form corporations in search of greater capital and limited liability. A large electrical contracting business would require huge amounts of capital which cannot be accumulated in either a sole proprietorship or a partnership organization. Thus a corporation or a joint stock company would be a limitless source of capital through the general public who can buy the shares of the company on the stock exchange. A corporation has got a separate legal entity, thus is considered as a “person” in the eyes of law and can exercise all the rights to which a natural person is entitled to. Secondly, the shareholders cannot be held liable for the debts of the company (limited liability). Forming a corporation and expanding would mean large scale production and economies of scale, but this needs to be properly managed by the board of directors. However, there is strict legal control over the actions of every corporation and they have to abide by separate laws. Lastly, a corporation is heavily taxed as compared to a sole proprietor and a partnership and can issue the tax id’s mentioned for a partnership organization. Conclusion An electrical contracting business cannot be managed and financed by a single person and involves too much risk for the owner therefore is not a good choice. A partnership, although reduces the risk and eases the managerial and financial duties, is still not a good choice as it has unlimited liability. Therefore a corporation is the best organizational structure for opening an electrical contracting business. This provides limited liability and huge amounts of capital through the stock exchange. However, managing and abiding by all the rules and regulations is important. References Website 1. http://careeramplified.com/How-to-start-an-Electrical-Contracting-Company-Business.html Read More