Choosing a Legal Form of Business

Many of us probably have the thought of becoming an entrepreneur. With this thought comes many questions and you must have a plan. Let us say that you have an idea for a new kind of home appliance. You are convinced that this new technology idea would be applicable in a wide range of other products. With this idea in mind you have a few issues. You have little financial skills and no management skills. You know nothing about manufacturing other than that it costs lots of money to set up a plant. Also, your net worth is not very high so you have no idea if you will be able to fund this start-up.

So you must look at every aspect before making a decision on what would be the best business type, short term and long term. CHOOSING A LEGAL FORM OF BUSINESS Discussion Starting a new business in either type, (sole proprietorship, partnership, and corporation) each have its ups and downs. All entrepreneurs must decide which form of legal ownership best suits their goals. Take a look at sole proprietorship. This type of business is owned and usually operated by one person. That one person is also responsible for all of its debts.

It has a low start-up cost but its hard to borrow money to start up or expand. Now let us move on to partnerships. This is a business with two or more owners who share in both the operation of the firm and the financial responsibility for its debts. General partnerships have the ability to grow by adding new talent and money. They also find it relatively easy to borrow money and can invite new partners to invest. Partnerships also have disadvantages like unlimited liability. Each partner maybe liable for all business debts incurred by any of the partners.

There is also difficulty in transferring ownership. Due to these disadvantages some have tried alternative agreements. A limited partnership is one alternative. It allows limited partners who cannot take active roles in operations but invest money and are liable for debts only to the extent of their investments. Another alternative is a master limited partnership. This is an organization that sells shares to investors on public markets, retains 50 percent ownership, runs the business, and provides detailed operating and financial reports to minority partners, who have no management voice.

CHOOSING A LEGAL FORM OF BUSINESS Then we have the corporations business that is legally considered an entity separate from its owners and is liable for its own debts. Limited liability is a big advantage for corporations. Investor liability is limited to personal investment in the corporation. Continuity is also important because shares of stock may be sold or passed on and most corporations benefit from the continuity provided by professional management. Corporations also sell stock and expand the number of investors and the amount of available funds. So raising money is another advantage.

Those advantages may seem appealing to the eye but let us not forget the disadvantages of a corporation. The biggest disadvantage is double taxation. Profits earned by corporations are taxed twice- at both the corporate and ownership levels. Much more financial reporting requirements is another disadvantage. So as we look back on each form of business, which for would be the best for a person with the previously mentioned issues. Using the information given, my choice would be to go with a corporation. This appliance could work with a wide range of other products.

This gives others a chance to invest into your new technology and funding would not be an issue. There is also a group that would handle the finances and management of this product in which you have no skills. Sole proprietorship and partnership was ruled out due to funding issues. A corporation in my opinion, is the best form of business for this type of new technology. CHOOSING A LEGAL FORM OF BUSINESS References Business Essentials, Seventh Edition, by Ronald J. Ebert and Ricky W. Griffin. Published by Prentice Hall. Copyright 2009 by Pearson Education, Inc.