The structure of a business is essential to its functioning, as it defines the legal framework that surrounds the company, including taxes, ownership, and the overall status of the enterprise. A successful entrepreneur should understand the differences between various forms of organization, their advantages and disadvantages, and the conditions for their creation when considering starting a new company. This essay aims to describe the different legal business categories, highlight their primary traits, and evaluate one of them in a hypothetical scenario.
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A proprietorship is a form of organization where one person owns the entire company, and all of its business is conducted under his or her name. The advantage of the structure is the owner’s ability to make quick decisions and put them into practice immediately. However, according to Brooks (2016), the owner also pays all of the company’s bills, potentially selling off his or her property in case of a debt, and the company ceases to exist once the owner dies. In addition, the freedom of action available to the owner makes this variety of company easy to create and popular.
A partnership is a situation where multiple people own the company, with property shares and participation degrees being clearly outlined. The advantages are the superior capabilities and capital of several people when compared to a single proprietor. However, Brooks (2016) notes that the disadvantages of the form above remain in effect, though partners can opt to be less involved in and liable for the functioning of the business during the formation of the agreement. Overall, the two types of organization are highly similar, although partnerships are more difficult to form due to the need for cooperation between multiple people.
A corporation is a more advanced form of a partnership that establishes itself as an independent legal entity for most intents and purposes. It separates owners and managers, with the former having an indirect, though still significant, influence on company policy. The advantages of the model include the non-liability of the owners and the ease of transferring ownership. However, according to Brooks (2016), the owners are effectively taxed twice, and the workings of a corporation are governed by a large variety of entities and documents, which are costly to create continuously. Ultimately, corporations tend to be the most common form of existence for large companies due to the ease of ownership transfers.
Specific varieties of corporations exist that can avoid particular disadvantages associated with the traditional model. Examples include limited liability corporations (LLCs), particularly professional corporations (PCs), and S corporations. Brooks (2016) describes the former as hybrids between partnerships and corporations that reduce personal responsibility and the latter as corporations with less than 100 owners that do not have to pay corporate taxes. Generally, these varieties of the model can obtain advantages over the standard organization in exchange for the requirement to follow specific rules.
The final legal business model is the non-profit organization, examples of which include foundations, charities, and others. This variety of business does not seek to obtain profits and declares the development of a community, a group of people, or another socially significant matter as its primary goal. The government acknowledges the fact, and therefore, according to Worth (2018), most not-for-profit corporations are eligible for tax exemption. However, the nature of the model means shareholders cannot expect to obtain profits and would not participate in the organization with that intention, effectively removing this variety from consideration when choosing a profitable venture.
Starting a Business
If I wanted to create my own business, I would have to determine its financial model first. Corporations and hybrid corporations would not be an appropriate starting choice, as they require a significant investment of resources and capital by multiple people to be created. A not-for-profit corporation would not align with my goal of making money, and therefore I would not consider it, either. As such, the choice is limited to a proprietorship and a partnership, as these variants are optimal for starting a small company. Among these two, I would most likely choose a partnership over a proprietorship because it would give me and the other participants access to a greater quantity and variety of resources, enabling faster growth and a higher likelihood of success.
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While a partnership does not require as much legal documentation as a corporation would, but it still requires the use of specific financial documents. According to Brooks (2016), these include the balance sheet, the income statement, the retained earnings statement, and the cash flows statement. In a typical situation, the first three documents would detail the overall financial condition of the company, and the fourth one would determine how the profits or debts of the business would be distributed among its owners. Due to the relatively simple organization of a partnership when compared to a corporation, the documents would likely not be highly complicated.
The cash flows statement is of the highest importance, as it details the amounts of money that would go to the owners. The other three documents serve as the basis for this one, providing the estimate of resources that can be extracted from the company or have to be supplied to it. The owners can make strategic decisions and choose assets to draw resources from or to fortify based on the information contained in the documents. The shares would be determined based on the original agreement between the owners as well as any amendments that took place after the company’s foundation.
The five primary types of legal business categories are proprietorships, partnerships, corporations, hybrid corporations, and not-for-profit corporations. The first two entail private ownership of the companies, and the owners pay personal taxes. Corporations are independent legal entities, a quality that, among other things, enables easier ownership transfers and so-called double taxation.
Hybrid and not-for-profit corporations attempt to retain the benefits of the structure while avoiding specific disadvantages such as liability or taxes. When starting a company, I would most likely choose a partnership as the original form because private ownership is optimal for smaller businesses, and multiple founders would be able to access more resources. Among the documents, I would consider the cash flows statement especially relevant because it would detail the profits that would go to each owner or the amount of money they would have to put into the company to counteract poor performance.
Brooks, R. M. (2016). Financial management: Core concepts (3rd ed.). London, England: Pearson.
Worth, M. J. (2018). Nonprofit management: Principles and practice (5th ed.). Thousand Oaks, CA: SAGE Publications.