As Piercy (4), contends, the process of choosing a form of business plays a significant role when starting up a business. In general, the criteria for this kind of task include the need for capital, the nature of the business’s future operations, the number of the people that participates in the operation and the establishment of the business, the responsibility, and the taxation issues. Some of the alternative options include going into business as a self-employed person or an entrepreneur, limited partnership, corporate, a general partnership, and limited liability company (Seethamraju 32). In summary, the forms of businesses discussed in this paper include corporations, sole proprietorships, limited liability partners, partnerships, limited partnerships, limited liability companies, corporate structures and governance.
By definition, sole proprietorships refer to a business that by law has joined existence from its owner. In this case, both the losses and the income are taxed on the personal income tax return of the individual. The sole proprietorships are not a legal entity (Merkert 3). In other words, they just refer to people owning the business, and they are personally responsible for their debts. In fact, the sole proprietorship is said to be the simplest form of business under which a person can operate a business (Piercy 6). Moreover, a sole proprietor can choose to do business under a fictitious name or operate an under its name. Such fictitious name only acts as a trade name. In simple terms, it creates no legal entity that is separate from the sole proprietor owner.
The business of sole proprietorship is very attractive because of its ease of setup, simplicity, and the nominal cost. To secure a local license, a sole proprietor just needs to register his or her name, and the sole proprietors are ready for the business. However, a distinct disadvantage of this form of business is that the owner continues to remain personally liable for the debts of the business (Seethamraju 35). Under such conditions, the creditors are free to bring lawsuits against the owner of the business, in case the sole proprietor business runs into financial risks. The success of the lawsuits means the owner of the business will have no option but to pay the debts of the business with his or her money (Merkert 5). Since the sole proprietor has no separate identity under the law, he or she typically signs contracts in his or her name. Practically, the taxation of the sole proprietorship is quite simple because the sole proprietorship is undoubtedly indistinguishable from its owner.
Some of the advantages or merits of a sole proprietorship as a form of business include the fact that its owners may feel free to mix their personal assets or business. Additionally, the sole proprietorships can carry little ongoing formalities as well as creating room for the owners to establish the form of business easily, instantly, and inexpensively (Seethamraju 37). Although a sole proprietor does not need to pay unemployment tax for herself or himself, he or she is required by law to pay unemployment tax on employees. On the other hand, there are also some disadvantages of a sole proprietorship form of business. First, the owners of the form of the business are subject to the unlimited personal liability for the losses, debts, and the liabilities of the business. Besides, the owners of the sole proprietorship are not allowed to sell an interest in the business for raising the capital. Additionally, the sole proprietorship does not retain value since they rarely survive the incapacity or death of their owners (Merkert 7). Overall, one of the sole proprietorship’s great features is the simplicity of formation. In this case, little more than selling and buying services or goods is needed. It is not necessary for an event or formal filing for the formation of the proprietorship. In fact, it is simply a status that arises automatically from the business activity of a person.
In practice, the two most important steps in the process of the partnership involve the setting up of the proper structure/ entity and the creation of the partnership agreement for the partnership. In addition, the key to designing a partnership agreement and the documentation of the terms helps in the understanding of the mechanics of how the business will be managed (Piercy 8). Note that the list of the items that are taken into consideration in a substantial agreement of partnership is indefinite. Partnerships are not the same; they are different. In the context of the roles of the partners in signing and authorizations, the partners themselves must have a clear understanding of what the officers or the managers of the business should be doing on behalf of the company. Additionally, the partners are charged with particular responsibilities and duties. In this case, the duties and the responsibilities of the partners are described to make each partner aware of what to expect from each other (Merkert 9). Moreover, the predetermined consequences should be put in place for partners not completing their duties.
Other things that also need to be considered in a solid partnership agreement include the requirement of a unanimous vote, contribution capital, the provision of expulsion, exit strategy or dissolution, provision of miscellaneous, a separate buy-sell agreement or a buy-sell agreement and so on. Under the contributions of capital, things such as the amount of money, time, and each asset to be contributed by each partner must be taken into consideration. The contributions include the initial one and the subsequent ones that can be necessary for the continuation of the business operation in the future (Seethamraju 42). Similarly, the partnership form of business must also consider the rights to distributions, compensation, profits, and losses. Some of the habits that help a partnership succeed include tax deposits and bookkeeping, communication and documentation, and the be involved in the business.
Limited partnerships exist when two or more partners decide to unite with the aim of conducting a business jointly. Under such conditions, one or more partners becomes liable for the quantity of the invested amount of money. Although the limited partners are not allowed to receive dividends, they can enjoy direct access to the expense and income flow (Seethamraju 47). One of the main advantages of the limited partners is that the owners of the business are typically not liable for the debts of the company (Merkert 10). In general, two or more individual make the owners of a partnership. In short, there is a total of three forms of partnerships namely joint venture, general partnership, and limited partnership. Although these businesses share similar features, they differ in various aspects.
Each of the business partners has to contribute resources such as money, labor, property, or skill in exchange for sharing in the losses and profits of the business (Piercy 9). In this form of business, at least one partner is charged with the responsibility of making decisions about the affairs of the day-to-day of the business. Although not a legal requirement, all members of the limited partnerships require an agreement that specifies outlines the ways of making decisions. Some of the decisions include the best means of splitting the losses and profits, conflict resolution, and the alteration of the ownership structure, in addition to the way the business is close, if necessary. According to Merkert (11), the United States limited partnership act helps in governing the formation of limited partnerships. For the formation of a limited partnership, the partners involved must first register the venture in its applicable state.
Limited Liability Partners
In simple terms, limited liability partners refer to a business organization that creates room for limited partners to enjoy the limited personal liability thoroughly. There are some similarities between a limited partnership and a general partnership. Essentially, the general partners have full control and management of the partnership form of business. However, they also accept the full responsibility for the liabilities of the partnership (Seethamraju 51). Equally important, the limited partners do not have a personal liability beyond in the interest of the partnership. In this case, they are not allowed to participate in the daily operations and the general management of the partnership business without being considered a public partnership in light of the law.
In practice, the general partners can either be a corporation or an individual. In fact, one of the more common situations of the limited partnership involves a silent partner. Under such conditions, either one or more limited partners helps in providing financing for the venture. Similarly, the general partners primarily assist in running the business (Piercy 11). In the context of protecting the assets of the silent partners, limited partnerships limit their liability and exposure in addition to acting as a conduit for passing current operating losses and profits on the partners. In most cases, the legal cost involves to form a limited liability partnership can be higher than the ones needed to form a corporation because security laws are used to govern them in some states.
Limited Liability Companies
By definition, a limited liability company refers to a hybrid type of legal structure that helps in providing the features of limited liability of tax efficiencies and corporation and the flexibility of operation of a partnership. Note that the term members are used to refer to the owners of a limited liability company. The members can consist of one owner (single individual), two or more persons, other limited liability companies, or corporations depending on the state. Limited liability companies are not subjected to taxation as a separate business entity as in the case of shareholders in a corporation. Instead, all the losses and profits are passed through the firm to each member of the limited liability company (Piercy 13). Most importantly, the members of the limited liability companies report both the losses and profits on their personal federal tax returns, similar to what the owners of the partnership would do.
The formation of a limited liability company involves several steps. These steps include first choosing the name of the business. Subsequently, the article of an organization is filed before creating an operating agreement. Henceforth, both the permit and license are obtained after which the employees are hired. Finally, the business is announced. The choice of a business name must follow three rules. For example, the proposed name must not be similar to the existing limited liability company in that state (Seethamraju 53). Secondly, the name must indicate that the proposed business in a limited liability company. Lastly, the name must not include any word that is restricted by the state. Some of the advantages of a limited liability company include limited liability, better way of sharing profits, less recordkeeping. However, some of the disadvantages of the limited liability company include self-employment life and the limited life.
Corporations refer to a legal entity that is both distinct and separate from their owners. In fact, they enjoy most of the responsibilities and rights possess by an individual. For this reason, a corporation can loan, enter any contracts, and borrow money, hire employees, sue and be sued, pay taxes and own assets (Piercy 16). It is popularly known as a legal person. Corporations are very useful globally for the operation of all kinds of business. Although the limited liability is the most aspect of a corporation, its exact legal status varies slightly from jurisdiction to jurisdiction (Seethamraju 72). In simple terms, the shareholders can participate in the profits through the appreciation of stock and dividends but are not held personally liable for the debts of the company.
Most of the major businesses in the world are corporations. Some of these businesses include the Coca-Cola company, Microsoft Corporation, and the Toyota Motor Corporation. The incorporation of a corporation by a group of shareholders with ownership of the corporation leads to the creation of the Corporation (Piercy 17). In general, the primary objective of a corporation can either be for making a profit or not, for example, in the case of charities. A corporation can be made up of either a single or several shareholders. The corporate laws also help in creating and regulating the corporations under their jurisdiction of residence. According to Merkert (12), the board of directors are charged with the responsibility of executing the business plan of the corporation and must take all the essential means of doing such activities. Although the board members are not generally responsible for the debts of the corporation, they also owe a responsibility of care to the corporation form of business.
Corporate Structure and Governance
Often, the corporate structure and governance are the most viewed as the relationships which help in determining the direction and performance of the corporate. The board of directors plays a crucial role in the corporate governance. In light of its relationship to other primary participants, both the management and shareholders are very critical. More of the participants include customers, creditors, employees, and the suppliers (Merkert 13). Additionally, the framework of the corporate governance also depends on the regulatory, ethical environment, legal, and the institutional of the community.
The act of guiding, steering, and piloting helps in describing what the beards should be doing when they are in session. Piercy (21), notes that the system of corporate governance refers to the combination of mechanisms for ensuring that the agent (management) runs the firm to benefit either one or several principals (stakeholders). Such shareholders or principals may cover creditors, employees, shareholders, clients, creditors and other parties with whom the firm conducts its business. In general, an excellent corporate structure and governance play a crucial role in providing an essential ingredient in the success of the corporate and the sustainable economic growth (Merkert 17). Any research in this field requires a thorough interdisciplinary analysis, that draws above all on the law and economics, in addition to the close understanding of the modern practice of the business of the kind which results from detailed empirical research in the national system’s range.
In a nutshell, the business organization’s scope has widely extended after the industrial revolution. Each and every form of business plays a crucial role in the life of individuals. Essentially, the importance of business organization includes the efficiency in the use of resources, growth of products, technological improvements, use of skilled salesman, recognition of the problem, creative thinking, quick decisions, reduction of cost, fixing of the responsibility and so on. In this case, one must be very careful during the process of choosing a form of business. As already noted, the criteria for this kind of task include the need for capital, the nature of the business’s future operations, the number of the people that participates in the operation and the establishment of the business, the responsibility and the taxation issues. The right choice of business from is the only way to success.