Introduction
Businesses can greatly benefit from forming a formal business organization. It ensures the protection of business owners and decreases tax expenditures. After analyzing some of the advantages of formal business entities, this discussion post will describe some of its disadvantages and suggest that forming a formal business organization helps its development.
Main body
There are four main types of business entities with different characteristics, where Sole Proprietorships and Partnerships involve some risks. While sole proprietorships are convenient in their absence of formalities and double taxation, downsides include the lack of liability protection for the owner and the inability to claim some tax breaks as offered to other types of business companies (Lee et al., 2019). Similarly, general partnerships with two or more owners share the risk of the loss of personal assets (Cheah & Yahya, 2019). However, limited partners can act as investors, thereby protecting their liabilities. When forming sole proprietorships or partnerships of different types, the owners should be ready for the risks of losing their assets.
Conclusion
The last two types of entities are Corporations and Limited Liability Companies (LLCs) that offer liability protection. The protection of liabilities is the main strength of these types of business entities that may overweigh their downsides. As for the corporations, these independent legal entities are difficult to organize because of increased paperwork and fees (Thangaveloo et al., 2022). Other than that, having shareholders, corporations’ profits can require double taxing. In contrast, LLCs combine the advantages of partnerships with the security of a corporation. Furthermore, for tax reasons, LLCs can be classified as either sole proprietorships or a corporation.
In conclusion, forming business entities can effectively handle the specific operations of the business, making it more structured and professional in the eyes of customers and the general public.
References
Cheah, J., Amran, A., & Yahya, S. (2019). External oriented resources and social enterprises’ performance: The dominant mediating role of formal business planning. Journal of Cleaner Production, 236, 117693.
Lee, B., Park, C. W., Joung, D., Lee, C., Lee, S. J., Kim, T. I.,… & Kim, S. (2019). Classification of Growth Stages of Business Entities and Management Component Analysis in Forestry Convergence Industry. Journal of Korean Society of Forest Science, 108(3), 429-439.
Thangaveloo, A., Dorasamy, M., Ahmad, A. A. B., Marimuthu, S. B., & Jayabalan, J. (2022). Corporate governance and shareholders’ confidence in cooperative corporations: a systematic literature review. F1000Research, 11(144), 144.