There are several categories that a small business can fall into. Within these businesses there are legal, social and economic environments that effect how the business is run and whether the business is a success or failure. From the cost to run to how the tax return is filed; all three have their advantages and disadvantages. All three also can produce a lucrative income for the right person or people. It is imperative to the business for the owner(s) to choose which path is the best way to go while taking in consideration the pros and cons of each type.
Legal, Social, and Economic Environments of Business The idea of a three pronged cord came to me when I noticed how many cords have burned up on my appliances. The third prong on the cord would distribute the current better. My goal is to manufacture and sell my product. Small businesses are what formed our country. From the forming of our governments to starting computer companies in our garages business decisions had to be made.
There are three main organizations of small businesses: Sole Proprietor, Partnership, and Corporation. When opening a business the owner or owners need to know how each organization operates and which would be the best for them. Each has its own advantages and disadvantages, but every business falls into one category or another. Business Organizations Sole Proprietor: A sole proprietor is a single individual who makes all the decisions in the business. There is no one to run to and ask “What do you think about this? ” It is the most simple of the three types because there are almost no legal requirements. As a sole proprietor there is more freedom to do what the individual wants which makes it much easier to run.
Also, the individual can get a tax benefit and there is a lower cost to start (Tavassoli, 2013. Slide 9) Almost anyone can have a small business as a sole proprietor. Although saving some money on the start up and from tax exemptions are a plus, there are some things one has to take into consideration. One is the limited resources because there is no one else around to bounce ideas off of and most people don’t have the business sense to run their own company from the start, unless they’ve had previous experience and knowledge in that field (Tavassoli, 2013. Another is the difficulty of borrowing money.
Most banks or investors are hesitant to lend funds to one person because their financial resources are limited. Finally, all the liability of the business is put directly on the individual (Tavassoli, 2013. Slide 9). Whatever happens in the business is solely on the owner and there usually isn’t anyone to fall back on for help. Partnership: The second type of business is a partnership. There is more room for growth in this type of business because now we have an added talent or experience (Tavassoli, 2013).
You automatically have someone to get insight on ideas and bring more ideas to the table. There is a better opportunity to borrow money. Now instead of one persons income and assets there are two. Someone is more likely to help finance a partnership than an individual person (Tavassoli, 2013, Slide 10). In addition, the business return flows into the individual/joint return. Just as a sole proprietor, a partnership has unlimited liability. The only difference is now there is more than one person involved so burden is split.
In a partnership the owners are responsible for all the debt and expenses of the business (Ebert & Griffin, 2005). Something else to consider is the difficulty to sell a business owned by a partnership. Why is it difficult? Consent is always needed from the other partner. No decision can be legally made without the other partner agreeing. Corporation: The third decision is a Corporation. Companies like Apple, Ford, and Microsoft all fall into corporations.
One good thing about a corporation is the stockholders of a corporation have limited liability which means they are only liable for the amount they invested (Tavassoli, 2013. Slide 11) When there are law suits or debts only the corporation loses money. Lenders and investors are most like to provide funding for a legitimate corporation before others. Another thing is there is a better chance to find talent and pool ideas. The opportunity to create more jobs is another plus for being a corporation. With the good comes the bad.
In a corporation there are multiple stockholders that have to be answered to when it comes to business decisions (Tavassoli, 2013. ) Theses owners will have their own opinions on how things should be done and which ideas to be taken into action. A corporation can be easily taken over if it is agreed upon by the majority of the owners. The financial reporting requirements are more extensive. Finally, at the corporate level businesses are double taxes not only as a corporation but on the paid dividends to its stockholders (Ebert & Griffin, 2005).
After careful consideration I feel a limited partnership is the best choice for my business. A Limited Partnership would allow us to obtain financing in the future, rather than trying to get financing on my own as a sole proprietor. Also, the amount of liability is reduced because we are only liable for the amount of our individual investments. This allows my partner not to have to take an active role in the partnership. A limited partnership agreement is not required but will be put in place to protect each partner (CEC, 2010).