Introduction
In the current business world, the pace at which changes are taking place is so high that it will take only masters of the game to survive. Masters of the game are only those businesses that will make the most appropriate decisions in relation to the prevailing business conditions.
The choice of the form of business, be it sole proprietorship, corporation or Limited Liability Company will impact greatly on the safety of the business owner and also on the continuity of the business. This is as a result of the different legislative measures that are attached to different forms of business. A brief analysis of these business forms can give a clearer picture and thus enable one to make a business decision that is appropriate.
Sole proprietorship
Nolo lawyer’s directory defines sole proprietorship as “a one-person business that is not registered with the state as a corporation or a limited liability company.” This can also be defined as a business whose existence is legally not separated from its owner. The most striking characteristic of a sole proprietorship is the fact that it is an individual or natural person doing a business as one person and has no partners and thus registers the business in his own name. As a result of this, the debts of the company are the debts of the owners (Nolo, 2009).
Taxes
A sole proprietor has an advantage in terms of tax because he does not pay corporate taxes, therefore, exempted from double taxation. He only pays income tax on his profits. Business accounting is made simpler due to the reduced taxes.
Liability
This is one of the greatest threats associated with sole proprietorship. The owner of the business is legally not separated from the business. This means that the business debts are the debts of the owner putting his personal property at risk. He does not have limited liability.
Control
Unlike other forms of business, in sole proprietorship, the owner is the boss and thus assumes all the control of the business including day to day running and the entire decision making. He needs no consultation with others.
Continuity
Continuity of a sole proprietorship is in doubt incase of death or other unavoidable circumstances. This means that there is no other person to continue with the business activities.
Location
With sole proprietorship the location of the business is very limited due to the fact that he is alone. This makes him restrain his business within easily and quickly accessible areas. He does not enjoy the freedom of expansion to distant territories.
Compliance
It does not require too much government requirements to start up this form of business.
Profit Distribution
The owner of a sole proprietorship business enjoys all the profit alone. He does not need to share it with anyone else because he is the only owner and probably had to raise the start-up capital alone.
A general Partnership
This is a form of business where two or more people make a decision to engage into a business activity which can be oral or written and which does not require any articles of incorporation from the state.
Taxes
Like a sole proprietorship, it also has an advantage in that it doesn’t pay corporate taxes. The owners only pay income taxes on the profit accrued. Therefore there is no double taxation for the partners.
Liability
This is the worst part of this form of business. Any contract entered by one partner for the business irrespective of the others’ knowledge or consent binds them all. Owing to the fact that their liability is unlimited, one partner can make all of them lose their personal property.
Control
There is usually, no formal understanding which may lead to difficulties in decision making. The control of the business is an affair of all the partners therefore each has as much control as his contribution.
Continuity
This form of business does not offer many problems in continuity. Withdrawal of a partner does not affect the business because the remaining members can continue with the business without problems. They are not bound legally to dissolve the partnership in case of withdrawal.
Location
Location can be flexible because the different members can share the running of the business activities. Also, the expansion will not need too many formalities in terms of establishing another business elsewhere.
Profit Distribution
Compliance
It is simple to start needing no State requirements. It is an informal get-together of people with an interest to start a business. The State, therefore, plays no role.
This happens according to the mutual arrangements of the partners. It could be as a result of the capital contribution or any other form that dims fit for the partners. This is an advantage because every partner will feel that comfortable with his profit margin. After all, it was a mutual understanding.
Limited partnership
The limited partnership involves the coming together of individuals to do business where one is a general partner and is responsible for running all the day to day business activities and is liable to all the business activities while the limited partners only contribute to the start-up capital and do not participate in the day to day activities neither do they incur obligations of the partnership. In case of a liability, the general partner is personally liable while the liability of the limited partner is as far as the actual investment. Partners can share profits and losses according to their own organization without basing on the equity interest provided they comply with tax laws (all business, 2009).
Taxes
A limited partnership does not pay corporate taxes. This gives an advantage to the partners in that they will not be double-taxed. They pay taxes according to their profit in terms of income tax. Starting is also more hectic compared to sole proprietorship and general partnerships. There are more formalities meaning paying of some start-up taxes.
Liability
Only the general partner is exposed to the risk of unlimited liability. This means that in case of business debt, the general partner’s personal property is endangered. The rest of the partners who are limited partners are protected by having limited liability. Their personal property is not in any danger incase of business debt.
Control
The control of the business is solely in the hands of the general partner. The limited partners’ sole contribution is the start-up capital. The day-to-day running of the business including decision making is for the general partner. It, therefore, means that he has control of the business.
Continuity
This form of business also offers continuity because the withdrawal of one of the limited partners does not lead to a compulsory dissolution. Therefore the company can stay for as long as the partners wish and the prevailing external circumstances.
Location
The location of this business can also be inflexible. This is because most of the day-to-day activities are managed by one person who is the general partner. This will mean that he has to be limited within areas that can be easily accessible. Also, due to the formalities required, it may prove expensive for the business to start up a new business.
Compliance
Although it needs some formalities, the involvement of the State including the requirements is limited compared to corporate but more involving compared to general partnerships.
Profit Distribution
The process of profit distribution is purely on the business partners’ decisions. They can agree on the terms that will favor all the partners. There is profit retention as all the profit belongs to the partners.
Limited liability Company
This is a business organization that exhibits both characteristics of a corporation and a partnership but cannot be classified as any of the two. Owners of such an organization are called members unlike other business organizations which have partners and shareholders. The number of members is unlimited (All business, 2009).
Taxes
Members of this business form do not pay taxes as a corporate. Taxation is based on the individual basis in terms of the income tax. There is therefore an advantage of there not being a double taxation. Formation can also lead to an addition of taxes because of the formalities included in the process of formation.
Liability
There is an advantage in this form of business because the members enjoy liability without paying corporate tax. All members of this partnership are protected by limited liability. It means that their personal property cannot be endangered incase of a business debt.
Control
The members of the business assume the responsibilities and control of the business organization. The day to day activities can be managed directly by the members in a member-managed LLC or they can appoint a manager (one of the members or one from outside) in case of a manager-managed LLC.
Continuity
Withdrawal of a member means a compulsory dissolution of the partnership. This means that the continuity of this business form is completely risky. Its existence is therefore not perpetual.
Location
There is flexibility in terms of location. The different partners can share running responsibilities in the different regions. But the cost of starting up a new business premise as a result of expansion can be expensive due to the required formalities.
Compliance
It requires some adherence to government specifications but not as demanding as the corporate companies. There are no need for meetings and minutes and recording of all resolutions.
Profit Distribution
Income for this type of business is passed through to the members. This partnership also provides a flexible profit distribution mechanism. It is not a compulsory fifty fifty distribution. The profit sharing mechanism is as a result of mutual discussion between the partners.
C-corporation
This is a form of business formed with the incorporation of the state and setting up requires the settlement of a certain fee. This type of business is separate from the share holders who are the owners and it pays its own taxes. The owners are therefore exempted from personal liabilities in case of a debt (more business, 2009).
Taxes
This business entity is separate from its owners. It is an independent entity that pays its own taxes. The owners therefore are exposed to double taxation through paying taxes as a corporate and at the same time paying taxes as an individual on the dividends. This is costly.
Liability
Due to its independent nature, the owners are protected through limited liability therefore making their personal property safe.
Control
By owning shares in the corporate, shareholders control its affairs. This is dictated by the ownership percentage as shown by the stock certificate issued by the corporate. Those shareholders with big ownership percentages will automatically have a stronger say compared to those with minor percentages.
Continuity
The death or withdrawal of any of the members does not result into a forced dissolution. The continuity of the company is therefore assured.
Location
It is easier to expand due to available funds from the partners. The only problem experienced in expansion is the formalities associated with the starting of the business. The taxes involved are many and the formalities can be time and energy consuming.
Profit Distribution
Compliance
Formation of these forms of business could be demanding in terms of formalities required. Running of this form of business requires compulsorily, holding of meetings, writing of minutes for all the meetings and recording all the resolutions made.
The profit distribution comes in terms of dividends. This will therefore be distributed in relation to the number of shares in question. It is paid in terms of salaries and bonuses. The rest of the income is retained for reinvestment.
S-corporation
Taxation
This is a business entity formed in the same way as a C corporation but an IRS form 2553 is filed before 75 days are over changing the status from a C corporation to an S corporation. The difference between a C and an S corporation lies in their taxation by the state. Unlike a C corporation which is taxed as a different entity, S corporation is taxed as a partnership. Just like a C corporation, an S corporation also files a tax return and also a state return (more business, 2009).
Liability
Shareholders are protected by limited liability. This means that their personal property is safe in case of a debt.
Control
This form of business organization is also owned by the shareholders who in turn elect directors. It is the function of the directors to elect officials that take responsibility in the day to day running of the business. Also, it does not include foreign shareholders.
Compliance
Formation of these forms of business could be demanding in terms of formalities required. It also needs an additional signing of IRS form 2553 to change the status from a C corporation to an S corporation. Running of this form of business requires compulsorily, holding of meetings, writing of minutes for all the meetings and recording all the resolutions made.
Location
Expansion can be easier as compared to smaller partnerships. Funds can be found through selling of shares. Unfortunately, the formalities required before setting up one are so time and money demanding.
Continuity
A withdrawal of a member does not lead to a compulsory dissolution. This means that the continuity of such a business form is assured.
Recommendations
The best form of business to adopt is the limited liability company. Although this form of business can be exposed to a forced dissolution, it will give the proprietor a stronger capital base for expanding due to the contributions from other partners. In terms of profit sharing, this form of business will give him chance to decide on what amount of profit he will get and what percentage will go to the rest of the partners. It will also cost him less money, time and other formalities to start this type of business as compared to corporations. This is the aspect to consider in terms of location and expansion. Considering liability, this type of business will cover his personal property in case of a court case or a debt. Finally, through this business form, he will be exempted from double taxation.
The only risk he will run is the issue of continuity. In case of a withdrawal of a partner, the partnership will be dissolved compulsorily. Also, by deciding on this form, the control over the business will be reduced. He will not have total control as compared to sole proprietorship or limited partnership.
References:
All Business. (2009). “Business planning and structures.”. Web.
Morebusiness. (2009). “Different types of corporations advantages/disadvantages of corporations.” Web.
Nolo. (2009). “Sole proprietorship basics.”. Web.