Business Formation Types.
This is the simplest business form, which is started, run and owned by an individual. There are no formal actions required in setting up a sole proprietorship, and as long as there is ownership this status becomes automatically acquired. This is unlike any other form of business where one needs to obtain formal documents such as licenses and permits. The sole proprietor is entitled to all profits and also bears all business losses and debts. He/she makes decisions and has complete control of the business (Dlabay et al, 2009). There is no differentiation between the sole proprietor and the business and hence no tax separations between the two. The owner bears the taxes as the business profit is considered as individual income. This implies simplified tax preparations, which are at a lower rate considered to other entities.
The key limitation of this business formation is that there lacks a legal formality between the proprietor and the business (Ashcroft and Ashcroft, 2011). This implies that the proprietor is personally liable for all obligations and business debts. There is an unlimited personal liability, which extends to employees actions. It is also hard to raise the capital required in starting such a business as money is held in stock, and banks often hesitate to lend out due to perceived lack of credibility.
General Partnership.
This is made up of at least two entities that carry on trade. Each partner contributes capital, labor, skills, and property (Spadaccini, 2007). Profits, losses, and taxes are shared between the partners. Partners maintain an unincorporated status implying that it can be formed without any state formalities or even agreements amongst the partners. Like in a sole proprietorship, general partnerships do not provide asset protection, and this poses a business risk as the partners may lose assets in cases of liabilities or debts (Dlabay et al, 2009).
Limited Partnerships.
This requires both general and limited partnerships (Schneeman, 2010). The general partners are liable for business obligations while the limited partner has no obligations on debts, and cannot participate in daily operations or management. However, if the limited partner starts to manage the business, he loses the protection and exposes him/herself to personal liabilities (Ashcroft and Ashcroft, 2011). This business formality is best suitable when partners need to ‘silence’ or make some partners dormant.
Corporations.
This provides personal liability and protection to all shareholders. Failure to adhere to certain formalities leads to loss of protections, and the shareholders become personally liable. The structure of a corporation comprises of shareholders and directors. The shareholders own the business while the directors oversee the business objectives, and appoint officers to run the daily business operations. The corporation is a distinct entity from the stakeholders, and this distinction provides their protection (Schneeman, 2010). This implies that the corporation is liable for debts and taxes.
A design firm requires significantly high levels of initial capital and has lots of business risks due to increased levels of research and development. This implies that it requires cost sharing and protection. Forming such a business under limited partnership would be best suitable as the partners are protected, and can share profits and losses. Forming the business under sole proprietorship or general partnership may expose the business to massive operation and obligation risks. Additionally forming it as a corporation may induce high levels of expenditure, which may impact on profits.
Reference.
Ashcroft, J. D., & Ashcroft, J. E. (2011). Law for business. Mason, Ohio: South-Western Cengage Learning.Bottom of Form
Dlabay, L. R., Burrow, J., Kleindl, B., & Eggland, S. A. (2009). Intro to business. Mason, OH: South-Western Cengage Learning.
Schneeman, A. (2010). The law of corporations, partnerships, and sole proprietorships. Albany, N.Y: Delmar Publishers.
Spadaccini, M. (2007). Business structures. Irvine, CA: Entrepreneur Press.
