A Comparison Between Forms of Business

Entrepreneurs and seasoned business owners alike have or will be engaged in the administrative structure of a business. Each form of business is conducive to the type of company an individual or people own. To establish which business configuration is best for the person’s objective, it is important to comprehend the meaning, basic concepts, advantages, and disadvantages of each structure. This essay will provide a brief analysis of sole proprietorship, partnership, corporations, and limited liability while highlighting its pros and cons. Examples of certain forms of business will be included to provide a better understanding of their significance.

Sole Proprietorship is best known as the most common form of business structure in the United States. The sole proprietor is the only person entitled to the benefits and assets of such a business. The federal government considers individuals who are self-employed to be the sole proprietor of their business, considering the individual only has that one business. Some of the most popular forms of businesses constructed by sole proprietors in 2008 are professional, scientific, technical services, construction, real estate, rental, leasing, and retail trade (Schneeman, 2013, p. 35). Sole proprietors are not required to provide extensive reports to account for all business decisions (Schneeman, 2013, p. 35). Furthermore, the costs of maintaining an organized structure is low, considering that of the other forms of business while receiving tax benefits. Although the advantages of sole proprietorship appear attractive, they can limit the growth of the business. To avoid a stagnant business, sole proprietors tend to incorporate into other forms of business to maximize their growth. The owner of such business is the only owner; hence, the only person responsible and held liable for all actions of the company (Schneeman, 2013, pp. 33, 38). For instance, should the driver of a flower delivery company hit a pedestrian with their vehicle, the sole proprietor of the company is held liable for any potential damages and injuries.

In contrast to sole proprietorship, once an individual associates with other people, a partnership is formed. The elements of a partnership include that all persons involved should carry on all aspects of the partnership together. Although this form of business can have multiple owners, the business itself remains as a single company. The co-ownership element signifies that the owners have the right to be involved in the management aspects of the business, the privilege of sharing all benefits and gains, as well as all losses, including any “trade, occupation, or profession” (Schneeman, 2013, pp. 33, 57). While not all partnerships are for-profit, such as non-profit organizations, the intended purpose of partnerships is profit-oriented. Due to the tax benefits of limited liability businesses, which will be discussed last, partnerships have declined in popularity. While a sole proprietor is the only managing voice within their business, a partnership business has the advantage of incorporating several participating voices and the flexibility of their background knowledge and experiences towards decisions. As the advantage of a sole proprietorship business, partnerships are to abide by minimal regulations and statutory laws (Schneeman, 2013, p. 76). Although the various voices of authority can be attractive for businesses, the different personalities might result in opposing management decisions, which can lead businesses to fail.

Converse to sole proprietorship and partnerships, corporations are governed by state statute, federal law, and local ordinances. Moreover, a corporation is an “artificial entity” created by law. While sole proprietorship is an extension of the individual proprietor, a corporation is a separate entity. Consequently, a corporation is held equally liable for debts and damages, as a person would. Unlike the sole proprietorship business form, which terminates upon the death of its owner, unless transferred to an heir; corporations can exist permanently (Schneeman, 2013, p. 260). As a corporation, owners are more likely to provide their employees with benefit plans; thus, decreasing the cost of income taxes. A major disadvantage of corporations is the high degree of formality and reporting required. Furthermore, a corporation is established by a written agreement/contract, and not just by verbal agreement; therefore, this form of business requires more complex documentation with its state authority.

Limited Liability (LLC) businesses encompass the benefits of the partnership and corporate forms of business. Like the corporation, LLC provides its owners with full protection in terms of liability. This type of business is often preferred for small businesses in America. In comparison to the partnership, LLC is entitled to tax benefits. Unlike the sole proprietorship, the owners of an LLC are protected from personal lawsuits and liabilities (Schneeman, 2013, p. 222). In contrast to corporations, LLC is relatively a new form of business. Consequently, the courts have not established much precedents and judgments are sometimes based on court assumptions, knowledge, and experience (Schneeman, 2013, p. 223). A proactive method of lowering the risks of being involved with the courts is by hiring a corporate attorney to manage the legal matters of the LLC. Fraud is an exception to limited liability protection. For instance, should a partner defraud investors, that person may be held personally liable for the damages they caused.

A basic analysis of the various forms of business was accomplished through this essay. After reviewing the meaning, advantages, and disadvantages of sole proprietorship, partnership, limited liability, and a corporation, the reader should have basic knowledge of each structure and the business situation they are best applicable. Examples were included in certain forms of business for a better understanding of each structure and its implications. Laws of liability and taxes were included.

Reference

Schneeman, A. (2013). Sole proprietorship, general partnerships, limited liability company, corporations. In The law of corporations and other business organizations (6th ed., pp. 33, 35, 37-38, 57, 76, 206, 222-223). Clifton Park, NY: Delmar Cengage Learning.