Corporate Law for Managers - Assignment Example

Corporate Law for Managers Dear Peter: As you have approached me for an advice regarding the type of business that you want to operate, I would like to explain advantages and disadvantages of three basic structures of businesses, which include Limited Liability Company or Unlimited Liability Company, sole proprietorship, and partnership. Let me explain each business structure one by one in order to give a clear picture of these structures to you. 1. Company (Limited Liability and Unlimited Liability) There are two types of companies, Limited Liability Companies and Unlimited Liability Companies. 1.1 Limited Liability Company A Limited Liability Company is a type of business, which share some characteristics of corporation, sole proprietorship, and partnership although it is neither corporation nor a partnership. The main difference between limited companies and corporations is that a limited company is not taxed as a separate entity (McGuigan 2011). In these types of companies, owners are termed as members instead of partners or shareholders. The number of members of a limited liability company is unlimited. Corporations and other limited companies can also become members of a Limited Liability Company. 1.1.1 Advantages of a LLC 1.1.1.1 Limited Liability Limited liability is one of the main advantages of a LLC. The limited liability is one of the primary reasons why most of the small businesses choose to become a LLC. Owners of a LLC enjoy the liability protection benefit just like corporations. A LLC can maintain the status of a separate entity. In a LLC, members cannot be held personally liable for debts before signing a personal guarantee (Zahorsky n.d.). 1.1.1.2 Flexibility A LLC is easier to operate as compared to partnerships or corporations. There is more flexibility in limited liability companies as compared to partnerships. Unlike partnerships, a LLC can vary the profit sharing ratio. Moreover, in a LLC, there is no compulsion of arranging meetings and maintaining a proper minutes of the meeting schedule as in corporations. 1.1.1.3 Taxation There is a tax advantage for limited liability companies because there is no concept of double taxation as they are in corporations. Payment of individual and corporate taxes immunes LLCs from double taxation. 1.1.2 Disadvantages of a LLC 1.1.2.1 Franchise Tax and Limited Life Due to the limited liability status of LLCs, some countries impose franchise tax on the LLCs. Tax fee is based sometimes on revenues of a company, earned profits, and invested capital and sometimes it is a flat fee. Another disadvantage is limited life of a LLC. Unlike corporations, bankruptcy or death of a member results in dissolving the LLC. 1.1.2.2 Added Complexity Running a LLC is somewhat more difficult as compared to partnership or a sole proprietorship business. In partnership or sole proprietorship, there is less paperwork because of less government influence, whereas federal classification of LLCs as partnership or corporations adds complexity to the business in form of taxes and publicity of shares. 1.2 Unlimited Liability Company (LLC) The main difference between a limited liability company and an unlimited liability company is that a limited company is limited by the number of shares and the guarantee which is given to the members when they become members, whereas in unlimited liability companies, members can even use their personal properties or assets for the settlement of company’s debts and claims. 1.1.1 Advantages There are no legal limits on the members of a ULC as compared to the members of a LLC. In LLCs, owners cannot use their personal assets to cover company’s debts whereas, in case of ULCs, members can make use of their properties. “The potential for financial rewards with the ULC is often higher and can lead to significant profits for all concerned” (Tatum n.d.). 1.1.2 Disadvantages A risk regarding unlimited liability company is that if a member use his or her personal assets for the settlement of debts, the member should be able to absorb the risk in case of company’s failure in the market. If a company has a high probability of failure in future, investing in such companies can adversely affect the financial position of the investors in case of business failure. 2. Sole Proprietorship “A sole proprietorship is a business of one without corporation or limited liability status” (Zahorsky n.d.). Sole proprietorship is the most common form of business, which is run by a single person who is responsible for profits, and expenses of the business. There are no federal or state regulations in case of such business and one can organize and manage sole proprietorship very easily and informally. The owner is the only person responsible for the management of the business. For a person wanting to start a new business, sole proprietorship can be the best option because there are neither any specific rules and regulations nor any separate taxes on the business. 2.1 Advantages 2.1.1 Quicker Tax Preparation One of the main advantages of sole proprietorship is that the owner can fill the taxes much easier as compared to corporations. You just have to file an income tax return along with the profits and losses occurred from the business. There is no separation between business income and individual income in case of sole proprietorship. Both incomes are considered the same. The owner has to pay only income tax to the government. 2.1.2 Ease of Handling Money Money handling in sole proprietorship is much easier as compared to other business structures. You can keep your money either at home or in a personal bank account. There is no pay-roll setup required to run the financial matters. In case of consultancy business, we will just have to provide consultation services to the customers and put the money in our pocket. Sole proprietorship is a very convenient form of business, particularly for those, who do not want to go into complexities of other business structures. 2.1.3 Lower Start-Up Costs Low start-up cost is one of the main features of a sole proprietorship. Low capital is a big problem for most of the new entrepreneurs. The cost of setting up new companies or investing in the corporations is a much more costly decision as compared to the decision to begin from sole proprietorship. “The costs of setting up and operating a corporation involve higher set-up fees and special forms” (Zahorsky n.d.). In sole proprietorship, there is no issue of fee for lawyers and legal procedures. Therefore, we can say that sole proprietorship is a low cost and easy to manage business structure for the entrepreneurs. 2.2 Disadvantages 2.2.1 Personal Liability One of the main disadvantages of sole proprietorship is personal liability. The owner of the business is solely responsible for all expenses and debts related to the business. In sole proprietorship, business is not a separate legal entity and all personal assets are linked to the business (Zahorsky n.d.). Another point is that working alone is not always productive for the business. You may require some other consultants to assist you in your business dealings. 2.2.2 Difficulty in Raising Capital Another disadvantage is that investors do not prefer to invest in small businesses because sole proprietorships are less likely to take advantage of new markets as compared to corporations. Growing the business is somewhat difficult with less capital and in case of sole proprietorships; the profit is not always big enough to invest in new markets. 2.2.3 No Proper Financial controls There is no proper financial control system in sole proprietorships because people do not require financial statements to manage their businesses. However, accounting controls are very important for a business. Zahorsky (n.d.) asserts, “No matter the legal structure of your business, take time to set up the proper financial statements for your company”. 3. Partnership A partnership is a business structure in which two more people form a company. In partnerships, there are no legal requirements to set up the business instead of signing a partnership contract. A formal partnership contract is a legal process, which makes all parties work towards the goals in a deliberate manner. Partnerships help people share the costs of starting a business. Partners equally share all expenses and profits generated by the company. Partnerships are based on the elements of trust, respect, and obligation. We can take example of Dolce & Gabbana Company, the founders of which although have separated but are running the company with mutual trust and cooperation. 3.1 Advantages 3.1.1 Best Use of Resources When there will be more people to run a business, they will make effective use of all available resources. One person cannot always manage things effectively because no person possesses all skills and abilities required to run all business activities. The business partners share the start-up cost of the business, which makes partnership an easy approach to go for a big business. 3.1.2 Financial Allocation Financial allocation depends on the type of partnership. “In a limited partnership, one or more parties are only responsible for the amount of money that theyve invested into the business” (Albo 2008). In a general partnership, all parties are equally responsible for success or failure of the business without any limit. 3.2 Disadvantages Sometimes the partners have different visions regarding the business, which create difficulties in managing the business. Some other disadvantages include personal disputes, unfulfilled commitments, liability of business debts, disputes in decision-making, and disagreements in operational plans. 4. Conclusion To sum it up, the three important business structures used in the business world include limited liability or unlimited liability companies, sole proprietorship, and partnership. All three types have some merits and few demerits. Sole proprietorship is the most commonly used business structure as compared to general partnerships and corporations. Entrepreneurs should choose among these three types based on capital, personal circumstances, and the nature of business that they want to start. References Albo, B 2008, Business Structures: Partnerships, viewed 21 March, 2011, . McGuigan, B 2011, What is a Limited Liability Company?, viewed 21 March, 2011, . Tatum, M n.d., What is Unlimited Liability?, viewed 21 March, 2011, http://www.wisegeek.com/what-is-unlimited-liability.htm Zahorsky, D n.d., Limited Liability Company 101, viewed 21 March, 2011, . Zahorsky, D n.d., Sole Proprietorship: The Right Business Structure?, viewed 21 March, 2011, . Read More