Legal forms of business include sole proprietorship, partnership, limited liability limited partnership, limited liability company, S corporation, franchise, and corporation. Each of these legal forms offers distinct benefits to business owners and investors. The decision to incorporate one legal form as opposed to another is often determined by circumstance and underlying factors. Cheeseman (2010) writes about the factors that determine selection of legal form of business.
According to Cheeseman ” The selection depends on many factors, including the ease and cost of formation, the capital requirements of the business, the flexibility of management decisions, government restrictions, personal liability, tax considerations, and the like” (p. 529). This essay will examine each legal form and develop scenarios to illustrate the most advantageous use of each particular legal form. Sole Proprietorship The sole proprietorship is the simplest legal form of business.
This business organization consists of a person who not only owns the business but also is the sole representative of the business. Cheeseman (2010) states that the “the owner of the business is the business and that there is no separate legal entity” (p. 530). Principal advantages of the sole proprietorship include low cost, complete control of business operations, and ease of transferring business interest. The sole proprietor is also sole recipient of all profits.
The ideal scenario for this legal form is an entrepreneurship that aims to earn a steady income but has no grand ambition to expand and become a large-scale operation. A small, family owned business such as a restaurant, hair salon or tattoo shop are good examples of ideal business scenarios for a sole proprietorship. Sole proprietors assume all the financial and legal risk of the organization therefore proprietors need to be assured that they can afford to assume this risk. Partnership
A partnership in the words of Cheeseman (2010) is “is a voluntary association of two or more persons for carrying on a business as co-owners for profit” (p. 533). Just as with sole proprietorships partners are liable for debts and obligations of their business. The advantage of forming a partnership as opposed to a sole proprietorship is sharing of obligations and debts among partners. Additionally each partner can contribute capital to start up and sustain the enterprise. Individual entrepreneurs form partnerships to increase chance of success and to minimize risk.
Attorneys, medical practitioners, accountants, and insurance agencies are good scenarios that support the viable use of the partnership legal form. Limited Liability Partnership Cheeseman (2010) defines a limited liability partnership( LLP) as ” A special form of partnership in which all partners are limited partners, and there are no general partners” (p. 623). The LLP is ideal for a group of partners who do not wish to have general partners and want to limit liability equally among each limited partner. Limited partners can only lose their initial capital investment if the business venture fails.
The ideal scenario for this type of legal form is a business enterprise that requires an initial investment of capital but partners need to exempt personal assets from legal obligation.. The ideal scenario for this type of legal form is medical practices, accounting firms, and legal practices. Many states restrict the use LLP to these types of professional businesses. Limited Liability Corporation A limited liability company (LLC) is “an unincorporated business entity that combines the most favorable attributes of general partnerships, limited partnerships, and corporations” (Cheeseman, 2010, p. 13). The LLC offers the guiding leadership and diversity of the general partnership along with the limited liability and personal asset protection of the limited partnership. Owners of an LLC are only liable for distinct individual actions and not those of other owners of the LLC. Members of LLC’s are only liable for their initial capital investment in the organization. As with an LLP members of an LLC are not liable for debts and obligations of the LLC. S Corporation A S corporation is a corporation that meets certain criteria and therefore can be placed in a more advantageous tax bracket.
The advantage of being a S corporation as opposed to a standard C corporation is that the qualifying company does not have to federal income tax at the corporate level. S corporations income is accounted for through the individual shareholders income tax returns. This is particularly advantageous if the S corporation is anticipating losses that can be offset against income of corporate shareholders. Profits can be taxed at a lower rate because they are considered income of the individual shareholder rather than the corporation.
The recession of past years and drastically lowered profits might offer an ideal scenario for qualifying corporations declaring themselves S corporations. Franchise According to Cheeseman a franchise is An arrangement established when one party (the franchisor) licenses another party (the franchisee) to use the franchisor’s trade name, trademarks, commercial symbols, patents, copyrights, and other property in the distribution and selling of goods and services (p. 630). Franchising offers distinct advantages to both franchisor and franchisee.
The franchisor is able expand into new markets and realize expanding profits, However the franchisor is not required to be present or to manage the franchise store. The franchisee can tapped into the resources and knowledge of the franchisor thereby offering a distinct advantage over the entrepreneur attempting to do it all on his or own. Restaurant chain franchises and automobile dealerships are ideal scenarios where products and services are licenses by owning organization to second parties who sell these products and services and thus earn profits for the owning organization.
Corporation The corporation is the dominant legal form of business in the United States according to Cheeseman (2010). 85% of all business organizations in the United States choose this legal form to operate under. Corporations can be owned by one individual or thousands of individuals. However, all corporation owners are called shareholders. Corporation are separate entities from the shareholders that own and invest in them, and the employees who manage them. The greatest advantage of the corporation is the potential for growth and expansion through the medium of public investment.
The ideal scenario for the corporate legal form is any organization whose goal is to corner market share and expand constantly. Corporate scenarios require a constant influx of capital to enable expansion into new markets and development of new products and services. Conclusion Corporation, franchise, S Corporation, Limited Liability Corporation, general partnership, limited partnership, and sole proprietorship are legal forms of business organization that offer distinct advantages and disadvantages.
Choosing which legal form is best for the entrepreneur is to a large extent dependent on circumstances and the scenario in which the entrepreneur operates in. Some entrepreneurs seek partnership opportunities with the intent to increase competitive advantage and limit personal liability. Other entrepreneurs are focused on capture market share and expand into new lines of business. Some opportunities require investment entities while others can function based on a simple structure with just a few owners. In all cases many factors need to be examined before determining which legal form is most advantageous.
Cheeseman, H. R. (2010). Business Law (7th ed.). Upper Saddle River, NJ: Prentice Hall