When opening a business, establishing new products or bursting into new markets, you will have choices to make. The choices you decide upon are all determined by the information you collect. The more familiar you are about the options you have, the better your choices will be when you venture into the business market. One of the best investments you can make before jumping into entrepreneurship is to research everything about the market. Whether you are starting from scratch, teaming up with another person, or buying an existing business, the first thing you should analyze is what form of business you will be partaking in.
The four most recent forms of business ownership are sole proprietorship, partnership, corporation, and limited liability. This research paper will cover the definition of each form, the advantages, and the disadvantages.
When you decide to open your own business and you make the choice to be the only boss, you have just made the decision to have a sole proprietorship form of business.
“The sole proprietorship form business is a business that legally has no separate existence from its “owner”; meaning this form of business has but ONE owner, according to Encyclopedia of Small Business (2002). This form of business ownership is the cheapest, most relatively uncomplicated business venture. In our society today, the vast majority of small businesses begin as sole proprietorships. If you choose this ownership, you and the business are one and the same. You can continue operating as a sole proprietor as long as you’re the only owner of the business. According to Encyclopedia of Small Business (2002), an advantage of having a sole proprietorship form of ownership is “an owner of this type of business gets to keep all profits derived from the operation”.
Another amenity for this form of ownership is “the owner has the authority to make all the decisions relating to the business. Since there are no co-owners, there is no need to hold policy-meeting sessions or form any group similar to a board of directors. The owner must bear the responsibilities that accrue from the decisions made”, this also according to Encyclopedia of Small Business (2002). Where there are advantages, there are disadvantages. According to Entrepreneur.com (2011), as the owner, “you are financially responsible for satisfying all business debts and/or losses suffered by the firm, even to the point of sacrificing your personal or other business interests to pay off any liabilities.” That means if you fail to pay a debt, the creditor can sue you for your business assets, as well as your personal assets. Making unlimited liability the major disadvantage carried by the sole proprietorship form of business ownership.
Another drawback for the sole proprietorship is “a owner can lose some lucrative tax-free fringe benefits because they cannot participate in company-funded employee benefit plans like medical insurance and retirement plans”, according to Entrepreneur.com. (2011). A sole proprietorship form of business ownership has great advantages and so pretty harsh drawbacks, however to kind of soften the blows from the disadvantages you could look into other forms of ownership, like the partnership form. Don’t want to personally deal with the short comings of having a sole proprietorship, but still want the simplicity of that form of business, you should try embarking on a partnership form of business ownership. According to Entrepreneur.com (2011), a partnership is defined as “a legal form of business operation between two or more individuals who share management and profits.” The federal government recognizes several types of partnerships.
The two most common types of partnership are general and limited partnerships. According to Entrepreneur.com (2011), “in a general partnership, the partners manage the company and assume responsibility for the partnership’s debts and other obligations. A limited partnership has both general and limited partners. The general partners own and operate the business and assume liability for the partnership, while the limited partners serve as investors only; they have no control over the company and are not subject to the same liabilities as the general partners.” A partnership is very similar to a sole proprietorship when it comes to its basic make-up; however, some of the benefits are very different. One of the major advantages of being in a partnership form of ownership is collaboration. According to Encyclopedia of Small Business (2002), “a partnership offers the advantage of allowing the owners to draw on the resources and expertise of the co-partners.”
Running a business on your own, while simpler, can also be a constant headache. But with partners to share the responsibilities and lighten the workload, members of a partnership often find that they have more time for the other activities in their lives. Another benefit to partnership is tax advantages. Encyclopedia of Small Business (2002), states that “the profits of a partnership pass through to its owners, who report their share on their individual tax returns. Therefore, the profits are only taxed once (at the personal level of its owners) rather than twice.” Even with all the promising benefit of a partnership it still has some deficiencies. One of these deficiencies is conflict with partners according to Entrepreneur.com (2011). While working with partners can be a great advantage to a small business owner, having to actually run a business from day to day with one or more partners can be a nightmare.
First, you have to give up absolute control of the business and learn to compromise. And when big decisions have to be made, such as whether and how to expand the business, partners often disagree on the best course and are left with a potentially explosive situation. Entrepreneur.com (2011), states “the best way to deal with conflict between partners is to anticipate them, by drawing up a partnership agreement that details how such disagreements will be dealt with.” Although there are numerous small and medium-sized businesses, big business, commonly known as corporations, play a dominant role in the American economy. Therefore you should know about them too. Wal-Mart, Abercrombie & Fitch, Nintendo, Gucci, Hasbro, and Sony; what do all these companies have in common? They are all large corporations that people use or purchase items from every day. Entrepreneur.com (2011), define a corporation as “a form of business operation that declares the business as a separate, legal entity guided by a group of officers known as the board of directors.”
According to Entrepreneur.com (2011), “a corporation has all the legal rights of an individual, except for the right to vote and certain other limitations. Corporations are given the right to exist by the state that issues their charter.” With a company this big of course there will be some good and some bad. There are tons of financial and legal advantages achieved by conducting an organization in corporate form. According to Carter, C., & Media, D. (2012), “organizing a business in corporate form allows a company to function independently from the owners of the business. And one or more people may operate a company in corporate form in many states. Also organizing a business as a corporation provides owners with personal asset protection. Companies operating as an incorporated business may find it easier to raise money. Incorporating allows a company to issue stock in an effort to raise money, allowing a company to issue multiple classes of stock.”
While there are several advantages to incorporating a small business, there are also disadvantages that need to be considered. According to Ward 2012, “when you incorporate your small business, you’ll have to file two tax returns each year, one for your personal income, and one for the corporation. This, of course, will mean increased accounting fees. A corporation doesn’t have the same flexibility in handling business losses as a sole proprietorship or a partnership. A further disadvantage of incorporating is that corporations are more expensive to set up. A corporation is a more complex legal structure than a sole proprietorship or partnership, so it’s logical that creating one would be more complicated and costly. Fees for incorporating a small business either provincially or federally range in the hundreds of dollars – and that’s just for the set up.” Determining whether your particular business would benefit from being structured as a Corporation or another form of business, such as a Limited Liability Company, is a complex decision.
Maybe we should look more into what a Limited Liability Company is. Want the best of both worlds; a mix between a corporation and a partnership? That’s where a limited liability company (LLC) comes into play. Encyclopedia of Small Business. (2002), defines a limited liability company as “a form of business organization with the liability-shield advantages of a corporation and the flexibility and tax pass-through advantages of a partnership.” The LLC originated from business owners longing to accommodate the business structure allowing them to function like a classic partnership. Their goal was to give income to the partners (who reported it on their personal income tax returns) but also to protect themselves from personal liability for the business’s debts, as with the corporate business form. With two different forms of ownership there has to be double the advantages and triple the disadvantages. With this form of ownership, a mix between a corporation and partnership, many of the advantages are one in the same. For instances, tax advantages, flexibility, and limited liability are just a few examples of the advantages these forms of ownership share.
A few benefits that they don’t share are simplicity and attractiveness to foreign investors. According to Encyclopedia of Small Business 2002, “the advantage that a LLC has over corporations is the ease of setting up and running one. Whereas incorporation can be an involved and costly process, all that is required to start an LLC is the filing of an Articles of Organization and the drafting of an Operating Agreement defining the company’s policies and procedures (a filing fee, though, will still be required of LLCs). Because LLCs have been in existence in Europe and Latin America for over a century, investors from those parts of the world are particularly knowledgeable about this business form.” Behind every great advantage is a less then great disadvantage.
There will be disadvantages with any one of these forms of ownership. With the LLC form of ownership the top disadvantage would be newness. Did you know that only Wyoming and Florida had LLC statutes on the books prior to the 1990s? According to Encyclopedia of Small Business 2002, the newness of the LLC means that the statutes governing the establishments of LLCs are still evolving. There is also virtually no case history in the courts to indicate how these laws will be interpreted. Another drawback of the LLC form of ownership is no perpetual existence. The Encyclopedia of Small Business 2002, states that “most states require that an LLC’s Operating Agreement set a limit to the company’s existence (usually 30 years). And in the absence of a clause in the Operating Agreement providing for the continuance of the LLC in the event of the death or withdrawal of a member, the LLC will cease to exist when such events occur.
The transfer of ownership is also more restricted for an LLC (like a partnership) than for a corporation.” Deciding the best form of ownership that suits your business venture should be given careful consideration and plenty of research. Whether it’s a form of ownership that is simple and easy to start, the aspect of collaboration, personal asset protection, or attractiveness to foreign investors, you should chose the form of ownership that best suites you, your needs, and whatever your products or services may be. No matter which form you chose there will be drawbacks and benefits. However they all have the potential to be great businesses if you do your research. Hopefully this paper gave you some helpful and useful tips.
Encyclopedia of Small Business. (2002). Limited liability company. Retrieved from http://www.enotes.com/limited-liability-company-reference/limited-liability-company Encyclopedia of Small Business. (2002). Sole proprietorship. Retrieved from http://www.enotes.com/sole-proprietorship-reference/sole-proprietorship Encyclopedia of Small Business. (2002). Partnership. Retrieved from http://www.enotes.com/partnership-reference/partnership-178672 Entrepreneur.com. (2011). Sole proprietorship. Retrieved from http://www.entrepreneur.com/encyclopedia/term/82652.html Entrepreneur.com. (2011). Partnership. Retrieved from http://www.entrepreneur.com/encyclopedia/term/82334.html Entrepreneur.com. (2011). Corporation. Retrieved from http://www.entrepreneur.com/encyclopedia/term/82108.html Entrepreneur.com. (2011). Limited liability company. Retrieved from http://www.entrepreneur.com/encyclopedia/term/82382.html Corporate.walmart.com. (2012). History timeline. Retrieved from http://corporate.walmart.com/our-story/heritage/history-timeline Carter, C., & Media, D. (2012). The advantages of the corporate form of business organization. Retrieved from http://smallbusiness.chron.com/advantages-corporate-form-business-organization-370.html Ward, S. (2012). disadvantages of incorporating. Retrieved from http://sbinfocanada.about.com/cs/startup/a/incorporatadv_2.htm