Business Forms Worksheet
This is a form of business that is formed and managed by one person. The business entity is the easiest business to establish. The proprietor bears the sole responsibility of all activities and challenges that accrue to the business (Keenan & Riches, 2007).
Advantages
1. The owner enjoys all the profit that accumulates from the business activities
2. It is the easiest business entity to establish because it requires few legal documents to start a business. The business and the proprietor are one entity i.e. the owner is the sole decision-maker.
3. The proprietor enjoys maximum privacy and can manipulate the structural organization of the business without any business.
Disadvantages
1. The proprietor has unlimited liability i.e. increase the business incurs losses; the owner has the responsibility of injecting his personal savings to cater for the operation expenses.
2. It is difficult to raise large capital because potential investors fear that the owner may mismanage the funds. (Keenan & Riches, 2007).
3. In case the owner dies, the operations of the business are terminated simultaneously until a new owner acquires the assets and operations of the business.
Summary
An example of a sole proprietorship business to form would be a retail shop. The first legal step is to select a business name that would identify the business with the customers. The business name will be approved by the ministry of industrialization. Additionally, the proprietor shall acquire business permits, income tax serial number and the employment identification number. The most motivating advantage to establish a retail shop is that profit is taken by the owner. However, the setback of unlimited liability is risky because a new business is susceptible to fail especially if the market response is negative. The owner will bear all creditors’ expenses.
Partnership
A partnership is a form of business organizations that are formed by two or more individuals and a maximum of 20 partners who decide to manage the business with intent to make profits. There are different types of partnerships that include limited partnerships, general partnership and limited liability partnerships. In a general partnership, all partners participate in the managing the organization and have unlimited liability to the business. On the other hand, limited partnership has one or several silent partnership whose contribute part of the capital to run a business, but do not engage in the activities of the business. (Keenan & Riches, 2007).
Advantages
1. All partners participate in the running of the business thus increasing the diversity of skills in the business.
2. Unlike in the sole proprietorship, the pool of capital may increases since the partners are many.
3. The partnership is easy to establish because only a partnership deed is required to start to operate.
Disadvantages
1. In the general partnership, the partners have unlimited liability. Evert partner is the custodian of each other, and they bear the liability even with their personal assets. In a limited partnership, several partners are silent and, therefore, are shielded from business liability. (Keenan & Riches, 2007).
2. The profits are shared equally among all partners. Therefore, partners may acquire little profit depending on the number of partners.
3. The decision-making process is tedious and long since all partners have to consult each other.
Summary
An example of a partnership is a supermarket. Partnership is appropriate because the partners will contribute substantial capital and share responsibilities. Additionally, they may choose a limited partner whose experience, recognition and capital may spur the firm to prosperity. A partnership requires preparation of a partnership deed according to the partnership Act. Specialization of skills is appropriate in partnership because efficiency and effectiveness will be achieved in the business. However, unlimited liability may deter potential partners from investing due to fear of losing their personal assets.
Limited Liability Partnership (LLP)
This is a form of partnership where all partners have limited liability. The partnership is favorable for partners that offer professional services such as law (Hall Jones & Raffo, 2004).
Advantages
1. The partners’ personal assets are protected from paying for the business’ liability. However, individual malpractice is not shielded, and the individual is personally liable.
2. The partnership may lure skeptical and risk-averse partners because they feel that their personal wealth is shielded from liability (Hall Jones & Raffo, 2004).
3. Partners may decide to withdraw for the direct management of the business but still continue to enjoy the business’ benefits based on his capital contribution.
Disadvantages
1. Unlike in general partnerships, partners in limited liability partnerships are not under obligation to hold consultations with all partners.
2. All the capital and properties contributed by partners is possessed by the partnership and the partners are not entitled to refund unless stated otherwise in the partnership deed.
3. Partnership is only limited to professional service providers and, therefore, cannot be operated on other business activities (Hall Jones & Raffo, 2004).
Summary
The law firm will be a favorable partnership. Legal requirements such as partnership deed, legal permits and registration by the relevant government department will be required before operations. Limited liability is a key advantage to potential and existing investors. However, biased consultations among partners may create disagreements in the business.
Limited Liability Company
This is a legal form of business entity that incorporates the features of partnerships and corporation. A single member Limited Liability company (LLC) is categorized as a sole proprietorship while a multiple limited liability company is recognized as a partnership.
Advantages
1. All members of a limited liability company own the company and are not shareholders.
2. All members are responsible for determining the role of every member as well as the profit and losses sharing criteria.
3. All members have limited liability.
Disadvantages
1. Unlike corporations, Limited liability Companies cannot be traded publicly and, therefore, challenging to raise a huge capital.
2. Many states have different rules for recognizing a Limited liability company and, therefore, difficult to expand its operations globally (Hall Jones & Raffo, 2004).
3. Unlike in corporations, the death or withdrawal of one of the members may result in the termination of the business operations and withdrawal of limited liability privileges.
Summary
The favorable example would be a company formed by fresh graduates because they can participate in the management of the business. A limited liability operation agreement is a legal document needed before the operation of activities start. The recognition of members as owners reduces the principal-agent problem in the business. The company cannot trade in the public and, therefore, difficult to raise extra capital easily.
S Corporation
This is a corporation in the United States with a capacity of between one and one hundred shareholders. The corporation is recognized under the Internal Revenue Code and Subchapter S (Keenan & Riches, 2007).
Advantages
1. All shareholders’ profits are taxed at personal income level. Therefore, there is no double taxation.
2. The corporation is exempted from personal income tax.
3. The management has the privilege to retained all earned profits to increase the capital
Disadvantages
1. Shareholders might be taxed for income they have not received if all the profits are ploughed back.
2. S corporation members must be from the host country only such as United States
3. An S corporation must have one class of stock.
Summary
The S corporation is shielded from double taxation that affects C corporations thus increases the amount of dividend given to shareholders. All shareholders must fill forms 2553 under the S Chapter. However, shareholders are restricted to only the host countries citizens’ thus prohibiting raising of capital from potential global investors.
Franchise
Franchise is a right given to a business to market and sell another companies products and services. The franchisor grants operating rights to the franchisee under stipulated guidelines on the terms and conditions of operation (Nickels McHugh & McHugh, 2005).
Advantages
1. It saves cost and time because the franchisee company is already established in the market
2. The franchise company is well recognized in the market and, therefore, likely to lure customers quickly, unlike a newly established company (Nickels McHugh & McHugh, 2005).
3. The franchisee company is trained by the franchisor on the prices and ingredients of products.
Disadvantages
1. The cost of buying a franchise is high especially if the franchisor is well established company.
2. Some franchisor may only provide support product and service support only during the initial stages and stop thereafter (Nickels McHugh & McHugh, 2005).
3. It may be disadvantageous to the franchisee if the franchisor’s products and services be not well-known.
Summary
A new business would sit well with a franchise because the franchisee is well established in the market. The franchisee needs to acquire certificate permit from the franchisor and also pays royalties to the franchisor. A franchise saves cost to the franchisor. The venture may be risky if the franchisor’s products are low quality or are not well known.
Corporation
A corporation is a separate legal entity that is established either through registration under the company’s Act or legislation by the members of the legislative assembly.
Advantages
1. A corporation has perpetual existence and, therefore, the death or withdrawal of one partner cannot lead to termination of a business (Keenan & Riches, 2007).
2. The owners liability is only limited to the capital they have injected into the corporation
3. It is easy to raise capital because the corporation can issue shares to the public.
Disadvantages
1. The process of forming a corporation is tedious and complex due to the many legal documents and procedure required such as a certificate of incorporation.
2. There is double taxation since both the corporation’s income and the shareholder’s dividend are taxed.
3. The corporation is managed by a board of directors on behalf of the shareholders thus raising the principal –agent problem.
Summary
A manufacturing company would be favorable for a corporation due to the large amount of capital required. The certificate of operation, memorandum and articles of association are the essential documents required. Limited liability of shareholders is an advantage because of the susceptibility of the business. Unfortunately, the principal agent problem between the shareholders and the directors may adversely affect the management of the corporation.
References
Keenan, D. J., & Riches, S. (2007). Business law. Harlow: Pearson Longman.
Hall, D., Jones, R., & Raffo, C. (2004). Business studies. Ormskirk: Causeway.
Nickels, W. G., McHugh, J. M., & McHugh, S. M. (2005). Understanding business. Boston: McGraw-Hill/Irwin.
