To begin and ultimately complete this week’s individual assignment, as well as, to fulfill the associated objectives, it was first necessary to thoroughly research and learn about each of the unique forms of businesses described in the course readings delegated to week two of the course syllabus. Further, this involved the detailed analysis of the similarities and differences, as well as, the unique principles and reasons behind each of the business forms, and to do so in a way that eventually allowed one to determine a business scenario that worked best for each form described. In the end, it became quite clear that whether a business takes on the form of a sole proprietorship, general partnership, limited liability partnership, limited liability company,
S corporation, corporation, or franchise, it is vitally important, as a business professional or aspiring entrepreneur in today’s marketplace, to understand the strengths, weaknesses, pros, and cons of each and every one of them. With all of this said, this brief research paper will provide the reader with valuable insight on each of these eight forms of businesses, and then proceed to explain what types of situations in today’s business world can best be utilized and consequently achieve that most success.
The first notable form of business in this list is a sole proprietorship. According to the authors of this week’s readings, sole proprietorships hold the distinction of being the simplest type of business to form (Cheeseman, 2010.) Further, the owner of this form of business is indeed the sole proprietor, and therefore, in legal terms, the business itself. Another piece of interesting information is that sole proprietorships currently constitute the single largest common form of business enterprises in the United States today (Cheeseman, 2010).
Furthermore, because of the advantages of being quick and easy to get started, ownership having the ultimate authority in all decisions within his or her organization, owners do not have to share any profits with corporate partners or superiors, and there are very few barriers of exist. A sole proprietorship could be an ideal form of business for a “mom and pop” restaurant, where the owners are more focused on doing this the way they want to do things. As opposed to having to adhere to or follow rules or regulations that are not necessarily kosher with the way they have always done things and plan on to continuing to do things far into the future.
A general partnership or ‘ordinary partnership’ is the way of doing business that can be traced back to the beginning of time. Further, a general partnership is classified as “a voluntary association between two or more people with the express purpose of carrying on a business” (Cheeseman, 2010). In most cases, partners are all personally responsible for any debts or obligations that may accrue. The four qualities that must be met for a general partnership to be deemed legal include: 1.) an association of two or more people 2.) carrying on a business 3.) as co-workers 4.) for profit (Cheeseman, 2010).
Many times the success of a partnership, such as this, relies very heavily on the strength and commitment each member has to upholding the rules agreed upon as the terms of partnership. To conclude this brief summary of the partnership form of doing business, it is important to mention scenarios where this form of business typically has a high rate of success and vice versa. While there are indeed many cases where partnerships have worked and all individuals involved seem to make money, get along with each other, and enjoy the overall experience.
The reality is that the vast number of general partnerships end unsuccessfully. Unfortunately, greed plays a lot into this sad statistic and practices such as what individuals in the industry call, “competing with your own partnership”, and “usurping a partners’ golden opportunity”. Unfortunately the list goes on and on, and leads to the conclusion that typically general partnership is indeed not the optimal choice in most circumstances when deciding how to start your own business in today’s highly competitive and ever-growing markets around the globe.
Next, a, Limited Liability Company, constitutes probably the fastest growing and currently most attractive form of business in many of the top competing industries of today. These businesses are characterized as being unincorporated entities and are governed by the unique state law of whichever state in which they were created. LLCs combine the most positive attributes of general partnerships, limited partnerships, and corporations. Further, owners are able to manage their businesses and remain only limited in their liability if things were to go very wrong for the company.
An advantage to this is that owners are considered separate entities from their companies, and, therefore, are protected if the company were to be sued (Cheeseman, 2010). Another advantage to operating in an LLC is the elimination of double taxation. While owners of many typical types of corporations have to pay taxes on both a personal and corporate level, in an LLC profits are only taxable on a corporate level. On the flip side of things, Limited Liability Companies are not without disadvantages as well. Just a few include; all members of the corporation must pay taxes on a corporate level, members are not permitted to pay themselves a wage, and managing members cannot avoid paying a self-employment tax (Joseph, 2012).
Based on both the advantages and disadvantages listed above, a scenario in which this form of company would be the optimal choice can be determined. One example of when a LLC is the best choice is when a company owns property that is predicted to increase in value. This is true due the advantage of not being taxed double when the property is sold or the company is liquidated. Further, the absence of double taxation gives owners in this situation a higher probability to make more profits than the stakeholders in other forms of business would be able to achieve.
To continue, a scenario in which an S Corporation would be the best choice is one in which the owner(s) are planning to build up a business in order to eventually sell it off at a substantial profit. This scenario works best when operating an S Corporation because of its many tax benefits. Selling a business can be the center piece of an individual’s retirement plan, and this form of organization has a reduction in taxable gains that makes it the premier choice when attempting to do so. Also, while still operating the company, owners can enjoy other tax benefits that are not available with other types of companies. For example, start-up losses and expenses can be written off, and like LLCs, the payment of taxes on both a corporate and personal level can be avoided. In summary, the tax benefits afforded by an S Corporation make it the best choice in this given scenario.
Franchises are another wide-spread form of business that includes many advantages as well as disadvantages. Scenarios in which this form of business would be ideal are those that are identified with people trying to capitalize on the success of other, already established, brands. One of the most common examples of franchises that can be seen today is in the form of fast-food restaurants (Caws, 2010).
The vast majority of fast food restaurants in America today are operated by franchisees. This means that the owners of these establishments have gained the right to operate and sell products under the brand name of a much larger company that is, most of the time, already well-known and established to potential consumers. An obvious advantage to doing this is that the franchise business owner will be able to capitalize on the branding power and customer security that a large company provides (Caws, 2010). Another reason why this form of business makes sense is that owners have the advantage of operating under a business model that has already proven to be successful.
Furthermore, the next form of business to be analyzed is a Limited Liability Partnership or LLP. In this special form of partnership, all partners are limited and none are general. This means that in an LLP there does not need to be a general partner who is personally responsible for the company’s obligations or debts. Instead, all partners are only risking the amount of their own personal capital investment if the company where to fail. These companies also enjoy the “flow-through” benefit that other forms of companies are afforded. This allows LLPs to avoid double taxation, and does not require any taxes to be paid at the partnership level (Cheeseman, 2010). Because of the nature of these partnerships, Limited Liability
Partnerships are the best choice in a scenario where a group of professionals are all planning to have an active role in the company. An example of a common form of LLP is a group of attorneys who band together under one company name to share in the success of each other, while at the same time maintaining their individual ability to control their own schedule, hours, and clientele base.
The conclusion to be made at the end of this research of the many various forms of business is quite clear. In essence, there are unique circumstances and scenarios in which each one of the above described forms of operating a company can be most beneficial to its owners and stakeholders. The key to choosing the best form is to analyze one’s distinct situation and then associate it to all of the advantages and disadvantages of each option. Doing this will provide a perspective business owner with the required knowledge to decide which business form best suits their individual needs and goals for the future.
References Caws, J. (2010). Deciding If a Franchise is the Best Choice for You. Retrieved from http://voices.yahoo.com/deciding-if-franchise-best-7442740.html Cheeseman, H.R. (2010). Business law: Legal environment, online commerce, business ethics, and international issues (7th ed.). Upper Saddle River, NJ: Pearson Prentice Hall Joseph, C. (2012). Limited Liability Company Advantages & Disadvantages. Retrieved from http://smallbusiness.chron.com/limited-liability-company-advantages-disadvantages-4369.html