When starting a business it is important to choose the correct type of entity that will allow it to be successful. Upon choosing the best entity for the business there are different rules and regulations that need to be followed including issues from liability to taxation. Starting a business requires some research on licensing, state laws, and regulations. Opening a business requires choosing an entity, taking control, taxation methods, and liability issues. The most common types of business forms are sole proprietorship, partnership, corporation, and S corporation.
Each type of business has its advantages and disadvantages when related to obtaining a start to a business, tax information, and liability. Lou and Jose are planning to open a sports bar and restaurants where customers can socialize and watch sporting events on large-screen televisions accessible throughout the bar. Lou and Jose are low on funds for starting the business but have a wealthy investor friend, Miriam, who is willing to be a silent partner within the business.
Lou, Jose, and Miriam should choose to have a limited partnership with the restaurant and bar. “A partnership is a relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business. ” Lou, Jose, and Miriam will be business partners. It would be best to venture into this type of business as a limited partnership Lou and Jose will take care of the business operations relating to the business and Miriam will invest the money for the business to commence and be a general partner.
Miriam will be a general because she will be a “partner who invest capital, manage the business, and are personally liable for partnership debts” (Cheeseman, 2010, p. 259). Miriam should allow Lou and Jose to keep control of business activities by sharing the profits from the business with them. Possessing a business as a partnership to share the responsibilities and lighten the load. The profits from a business partnership pass through to the owners of the BUSINESS ENTITIES PAPER 3 business who gather tax information and report their shares on separate tax returns.
Using a partnership entity allows business owners to be taxed once and at the personal level of the owners. A limited partnership agreement should be drawn up and all partners should agree to the terms. A limited partnership agreement is “a document that sets forth the rights and duties of general and limited partners; the terms and conditions regarding the operation, termination, and dissolution of the partnership” (Cheeseman, 2010, p. 261). The agreement is not required by law but is good practice when voting within the partnership. In a partnership entity, Lou and Jose will possess unlimited liability for the business because the two partners will manage all the activities
and plans. Miriam will possess limited liability because she is only investing in the capital to commence the business. Opening a bar can result in numerous liabilities. The partners in the business should obtain a liquor license and make sure that all customers are of the appropriate age to drink. Any employee serving alcohol should be the legal age of 21. This action is substantial because the bar could obtain a fine or even be shut down for the occurrence. The employees of the bar are to follow all standard employment laws and regulations to be in compliance.
Frank’s best attempt at making this dream work would be to open his business as a sole proprietorship until he has established his business fully. According to the textbook, “a sole proprietorship is a form of business in which the owner is actually the business; the business is not a separate legal entity,” (Cheeseman, 2010, p. 251). If Frank opens a sole proprietorship, there may be the need to obtain a license to do business within the city.
Should Frank become a sole proprietor business owner, he takes on the burden of losing the business and his entire capital contribution. When pertaining to taxation, “a sole proprietor is not a legal entity, so it does not pay taxes at the business level” (Cheeseman, 2010, p. 253). Frank would have to report BUSINESS ENTITIES PAPER 4 the business’ earnings and losses on the sole proprietor’s personal income tax return and pay taxes to the state and federal government. As with any business, liabilities are a concern. Unlike corporations and LLCs, sole proprietorship businesses are at risk of losing all the investments they have put forward into the business.
Frank would be at risk of losing his wealth should the business take a turn for the worse. Sole proprietorship business owners engage in a significant chance of becoming subject to litigation so adequate amounts of insurance that shield the business owner from losing personal assets is a must. Establishing a franchise can be a very lucrative move for those individuals who have the expertise to do so.
A franchise is “an arrangement that is established when one party (the franchisor) licenses another party (the franchisee) to use the franchisor’s trade name, trademarks, commercial symbols, patents, copyrights, and other property in the distribution and selling of goods and services” (Cheeseman, 2010, p. 275). Franchises come in different forms. Frank is a wealthy investor who has dreams of opening a chain of exterminating businesses across the United States. A franchise will offer Frank the opportunity to expand his business into multiple areas of the country while retaining control of his copyrights, patents, and trademarks.
Frank will also collect percentages of profits as a franchisor. Frank will have access to the franchisor’s resources and knowledge of the business, and will not have to carry the burden of debt on his shoulders when the business skyrockets. Franchisors and franchisees are separate legal entities for tax and liability purposes, and will allow each to have a relationship as an independent businessperson. A large amount of research is a requirement when one is seeking to start a business. Whether said business is a sole proprietorship, partnership, corporation, or S corporation, careful consideration needs to be in place.
The basics of the business should be substantial so that BUSINESS ENTITIES PAPER 5 owners are about to earn powerful profits and become successful individuals. Before taking the leap into starting a business, explore all the options one has available and reach unlimited goals throughout the venture. BUSINESS ENTITIES PAPER 6 References Cheeseman, H. R. (2010). The Legal Environment of Business and Online Commerce: Business Ethics, E-Commerce, Regulatory, and International Issues (6th ed. ). Upper Saddle River, New Jersey: Prentice Hall. http://www. allbusiness. com/glossaries/franchise/4951534-1. html http://www. irs. gov/businesses/small/article/0,,id=98214,00. html.