Introduction
Business owners have to create a contract to outline the authorities and responsibilities of each individual of the entity. Usually, this is done within the legal documents of the business organization. The particular position of each owner plays a role in the size of control and authority that they have within a business. Further, if a business does not have a contract, its structure can suffer from a lack of efficiency. There are four main types of companies, such as sole proprietorship, partnerships, corporations, and an LLC. Business entities have unique rules of contract creation and negotiation, as well as contract liability and the ability to sell a business.
Contract Creation and Negotiation
First, a sole proprietorship is the most basic form of business entity. It includes only one person, exemplifying personal entrepreneurship. Understanding that a particular individual activity is a business is possible through analyzing whether one is engaged in an activity that intends to bring in some profit. Even though it is a business, there is no need for any formal documentation or contract (Gordon, 2016). With that being said, employment is possible; however, the contract will not include the rights to any possible ownership of a company from an employee (Gordon, 2016). As was mentioned above, contracting is very simple in this type of business, because a business includes only one member; it is relatively risk-free and quickly approved.
Moreover, US law sees partnerships more as a collection of individuals than a single legal entity. Therefore, this practice means that all business assets are thought of as owned by one or more partners rather than the partnership entity (Ricks, 2017). For this type of business, a contract or a legal agreement is preferred, although not required. The aspects of the agreement are the name of the partnership, the allocation of ownership interests, partnership entitlements, responsibility management, possible new partners, the continuity of the contract, and potential disputes (Gordon, 2016). Therefore, although the company might include only two people, it is still a much more complicated process in comparison to the sole proprietorship.
Furthermore, unlike the entities mentioned above, a corporation is the most serious and legally organized body. The legal contract exists in the corporation as an agreement between the stakeholders, executives, and directors. Moreover, forming a corporation requires a corporate charter. Once this legal item is obtained, a board of directors must be developed, which then acts to validate various corporate actions and create bylaws (Gordon, 2016). Additionally, there are statutory-close corporations that tend to be smaller and have restrictions of scale, for example, shareholder count (Gordon, 2016). Thus, corporations have the most complicated contracting system, as it is the largest of the business entities possible.
Lastly, an LLC is formed when an individual (not a corporate entity) files an organization’s articles. LLC’s have relaxed maintenance requirements and must update their records on any significant changes in the LLC’s operation (Gordon, 2016). Ownership and equity of LLCs are held by membership, which functions similar to shareholding. Members receive a share of the LLC’s profits. LLC’s function under an operating agreement, analogous to the bylaws of a corporation. Overall, an LLC is not required to have an operating agreement, but it is highly recommended.
Contract Liability
Firstly, sole proprietorship lacks liability protection, which is usually included in most other types of common business entities. Therefore, the main obstacle in being a sole proprietor is that one is personally liable for their employees’ actions. Specifically, the liability lies for “Any contract obligations or torts committed as part of the business activity” (Gordon, 2016, p. 39). Moreover, a general partnership is very similar to a sole proprietorship in terms of liability, as each partner is liable for the business’s obligations or debts (Simkovic, 2018). Furthermore, unlike the above-mentioned entities, a corporation provides personal liability protection (Gordon, 2016). This protection means that officers and directors of the company are not personally accountable for any action taken within the company. However, a stakeholder can sue members if they decide that individual steps are damaging the company’s reputation (Gordon, 2016). Lastly, LLC, in the name, implies limited liability for the members. Thus, LLC protects individual owners and members of the company.
The Ability to Sell a Business
To begin with, a sole proprietor cannot sell a business because it is individual entrepreneurship. The necessary equipment, the property can be sold to someone else. However, this person would have to start their sole proprietorship. Moreover, the partnership contract can include the steps necessary to add another partner, the resignation of one of the partners, etc. (Gordon, 2016). Additionally, without the buy-sell agreement, each partner can sell the interests they own in the business. Moreover, the owners of the corporations own a certain number of shares. Therefore, if one wants to sell the company, it will only be possible within the number of shares that this individual holds (Gordon, 2016). Lastly, LLC also can be sold as its members can sell their interests of the membership that should be described in the contract.
Conclusion
All in all, different types of common business entities offer various contracting options. Sole proprietorship, partnership, corporations, and LLC all have their specific procedure for contract creation. The contract includes the number of individuals involved, the possible process of resigning, the percentage of interest or shares, and more. Moreover, sole proprietorship and partnership do not provide liability protection, whereas corporations and LLC do. Lastly, it is possible to sell most of the business entities; usually, it means selling the interests or shares rather than the entirety of the company.
References
Gordon, J. (2016). Business entities for entrepreneurs & managers. TheBusinessProfessor.
Ricks, M. (2017). Organizational law as commitment device. Vanderbilt Law Review, 70(6), 1303–1352.
Simkovic, M. (2018). Limited liability and the known unknown. SSRN Electronic Journal, 68, 1- 275.