When starting a business, one has to make a decision on the legal for of business that would be ideal for his business. This research paper will discuss some legal forms of business presenting scenarios where the legal business form would be the chosen legal entity.
Sole proprietorship
Sole proprietorship, being the simplest legal form of business, is owned and operated by one person. The single owner makes all the decisions and solely receives he profits.
Scenario: A mother in a small neighborhood wants to start a small business selling kitchen ware and groceries. The best legal form of business for the mother is a sole proprietorship. Starting a sole proprietorship is relatively easy and low cost. It is therefore a good form of business for a person who has little capital to start a business.
Partnership
Partnership refers to the association between two or more people on voluntary terms as co-owners of a business for profit.
Scenario: Two college mates plan on starting a garage after they are done with school. In this kind of situation, the best legal form of business for them is a partnership. This is because when operating under this legal form of business accords both partners an equal share in the responsibilities arising from the business as well as the profits.
Limited liability partnership
Unlike in partnership where responsibilities are shared equally, in a limited liability partnership, some of the partners have limited liability. This implies that one partner cannot be held liable for the misdemeanors of another.
Scenario: A group of lawyers who aspire to start a law firm in a state which does not permit these professional to form limited liability companies. For this case scenario, a limited liability partnership is the best form of business for the group of lawyers. This is because the partners will not be personally held liable for the misconduct and negligence of his partner but is liable for his own.
Limited Liability Company
This form of business is taxed like a partnership. However, it cushions the shareholders for any liability beyond their investment.
Scenario: A group of people want to start their real estate company. This would be the best legal business form for them. Apart from the fact that they avoid double taxation, if they were to file for insolvency, they would not be obligated to use their personal property to pay any debts. This is because they are cushioned from liability beyond their investment.
S. Corporation
A S. corporation is a regular corporation that passes any net income or loss to the shareholders in accordance with the internal revenue code chapter 1 subchapter S.
Scenario: A small business that wants better tax treatment because it has been double taxed. In this case scenario, an S-Corporation is the best legal form of business for the small business seeking better tax treatment. This form of business helps one avoid double taxation and pass through losses.
Franchise
Franchising involves licensing trademarks along with methods of doing business to other people.
Scenario: A shoe manufacturing company that is hoping to break into the international market by expanding into other countries. For such a footwear company, franchising is the best legal form of business. This is because they get their wares sold in new markets without incurring the cost of putting up plants and maintaining a workforce. The franchisor avoids the liability of managing and putting up plants to make the footwear.
Corporate form of business
In the corporate form the entity is owned by the members depending on the quantity of shares in the corporation one owns.
Scenario: A case where individuals want to expand and therefore invite the public to invest by a way of buying shares into the company through an initial public offering. This form of business is advantageous since profits are distributed according to ones contributions in terms of shares. This form of business also has some form of limited liability because ones losses cannot exceed the amount of money one contributed in terms of shares.
Conclusion
The success of a business is evidently very dependent on the legal form of business one chooses.
