Creation, Negotiation, and Approval of Contracts
A sole proprietorship is a legal structure in which a single person owns and operates the business. Therefore, the owner has the authority to create, negotiate, and approve contracts. The main advantage is that contracts can be signed quickly and without coordinating with others. The disadvantage is that the sole proprietor should have the necessary skills to negotiate lucrative contracts. In general partnerships, each partner has the authority to enter into contracts that are consistent with the company’s regular business operations (Cross & Miller, 2020). Its advantage is that partners have fiduciary relationships, fostering decisions in favor of the business and other partners (Cross & Miller, 2020). The disadvantage is that if one partner makes the wrong decision regarding contracts, the whole partnership will bear the consequences.
In a corporation, the authority to create, negotiate, and approve contracts belongs to the CEO or the president. Its advantage is that if a contract is signed by a non-authorized individual, the corporation will not have liability for it. The disadvantage is that a corporation is required to follow formalities in all aspects, including contracts. In an LLC, the authority to create, negotiate, and approve contracts belongs to managers or members of the LLC. Members of an LLC can also form an operating agreement, in which they can stipulate who has the power to sign contracts (Cross & Miller, 2020). An advantage of LLCs is the limited liability of its members, and a disadvantage is a lack of uniform state laws regulating LLCs.
Contract Liability
In sole proprietorships, the owner has unlimited personal liability associated with the contract. Hence, if a breach of contract occurs, the owner will bear the personal liability and may lose both his or her business and personal assets (Cross & Miller, 2020). This unlimited liability is the main disadvantage of sole proprietorships, and no advantages can be found. Liability in general partnerships is similar to that in sole proprietorships: all partners have unlimited personal liability (Steingold & Steingold, 2021). Moreover, partners are liable to contracts signed by one partner on behalf of the partnership (Steingold & Steingold, 2021). This is a disadvantage because, in case of a breach of contract, all partners risk losing their business and personal assets. Like in a sole proprietorship, no advantages related to liability can be identified.
Corporations and LLCs have similar legal terms regarding liability, which is why they will be discussed together. In both entity types, owners have limited personal liability, which means that, in case of a breach of contract on behalf of the company, their personal assets will remain intact (Steingold & Steingold, 2021). Hence, the business bears liability, and the owners’ liability is limited to their investments in the company. This limited liability is the main advantage of corporations and LLCs. A disadvantage is that if owners act beyond their corporate capacity, they will be personally liable for their own wrongs.
Income Taxation
In sole proprietorships, the owner and the business are one entity. Therefore, the owner pays personal taxes on business income; that is, there is no distinction between personal and business income (Cross & Miller, 2020). This taxation scheme is the advantage of this business form, and no disadvantages can be found. In general partnerships, there are also no business taxes, which is an advantage. All partners pay personal income taxes based on the share of profits allocated to each of them (Steingold & Steingold, 2021). The disadvantage is that the income tax on the share of profits should be paid regardless of whether these profits were distributed during that tax year.
Similarly, LLCs are not taxed as separate entities, which distinguishes them from corporations and can be considered an advantage. LLCs are taxed like general partnerships, with each member paying taxes on their share of profits or losses. Their disadvantage is that LLC members should pay self-employment taxes on their LLC profits. In contrast, corporations are subject to double taxation: they pay income tax on net profits, and their shareholders pay income taxes on received dividends (Cross & Miller, 2020). This taxation scheme is a major disadvantage of corporations; the company may temporarily lose its corporate status if it fails to pay taxes.
The Sale of Business
Since a sole proprietorship and its owner are the same, this type of business cannot be sold. The owner can sell only his or her business assets, but he or she still will be liable for the business’s debts and obligations. These characteristics are the disadvantages of sole proprietorships, and no advantages in this context can be found. In general partnerships, all partners have equal voting rights, and such important decisions as selling one’s share or the whole business require the unanimous consent of all partners (Cross & Miller, 2020). Partners may have a buy-sell agreement, which stipulates how business assets are valued and divided if the partnership dissolves (Cross & Miller, 2020). The disadvantage is that all partners should agree to transfer the ownership. The advantage is that if all partners decide to leave, they can sell their assets to an outside party.
An advantage of LLCs is that their members can sell the company’s assets and transfer the ownership of the entire company. The disadvantage is that, usually, all LLC members should agree to the sale. In corporations, ownership is transferred by the sale of stocks. A shareholder can transfer stocks to a new owner, and this procedure should be accompanied by a new entry in the corporate stock book (Cross & Miller, 2020). The advantage is that a change in ownership has no influence on the corporate entity. Hence, the business life of a corporation is unlimited, in contrast to other business forms.
References
Cross, F. B., & Miller, R. L. (2020). The legal environment of business: Text and cases (11th ed.). Cengage Learning.
Steingold, F. S., & Steingold, D. (2021). Legal guide for starting & running a small business (17th ed.). Nolo.