Types of business entity

Introduction: There exists a range of types of business entities, some of which could be more successful than others. It is definite that different legal structures of business operate and make decisions in various ways. This text suggests patterns for organizing the entrepreneurial examples in order to see what type of business is the most effective. It could be included three common types of business entities ——sole proprietor, partnership and limited liability company. Through briefly introduction, it would analyze differences among them and the purpose here is to get a conclusion on which type of business is the most effective.

“Here an individual is the sole proprietor of the business. They therefore have sole control over the business and can take all the profit from it. However, at law they also have unlimited personal liability. What this means is that they are responsible for any debts and losses. ” (D. , 2011) The sole proprietor is a quite popular as well as the simplest business entity as a result of its simplicity, ease to setup and small cost. Sole traders could amalgamate their personal and business funds and estate. However, other business entities such as limited liability companies and partnership cannot do that.

“A sole proprietor may use a trade name or business name other than his, her or its legal name. “(Government of westen Australia, 2014) It is common that sole proprietorships would have bank accounts using the name of the owner. Due to its simple form, the sole proprietor virtually do not have to observe formalities which bigger and more complex businesses always do, for instance,voting to make decision via formal meetings. In contemporary society, a good many of successful complex companies begin as sole proprietors and lots of young graduates have chosen to setup their own business, becoming a sole trader.

Because a sole proprietor is not distinguishable form its owner, the taxation is very simple. The income of a sole proprietor is that of its owner. On one hand, the sole proprietor has many advantages. Firstly, a sole proprietor can be easily, directly and with less money, established by the trader. Secondly, it is not necessary for sole proprietorships to carry formalities. Thirdly, sole traders do not need to pay unemployment taxation on themselves. On the other hand, there exists some disadvantageous aspects as well. In the first place, the sole proprietor owner is responsible for any debts and losses as well as the subject to liabilities for the business. In the second place, “sole proprietorships rarely survive the death or incapacity of their owners and so do not retain value” (Entrepreneur, 2005).

Partnerships are another entity of business, which is “an association of two or more persons to carry on as Co-owners of a business for profit” (UPA, 1997). As a essential type of business entity, partnerships are cooperation of two or more owners who conduct of business for profit, sharing profit, losses and property by joint owners. A partnership can be easily setup by a simple agreement or even a handshake, nevertheless, would better be begun by a detailed and thoughtful partnership agreement. “Usually when a partnership is formed the partners will draw up a document called a deed which is in effect a constution for the partnership.

This will deal with issues such as who provides the capital for the organization, the management structure, and the allocation of the profits. ” (D. , 2011) There are two types of partnerships, which are general partnerships and limited partnerships. In the former, all of the partners would have equal responsibility for the business’s debts and liabilities and every owner has the equal right to manage the business. In contrast, for the latter, separately, there are one or more partners who are just general partners and one or more partners who are limited ones.

One one hand, general partners pay taxation as individuals and are personally liable for all of the debts; they could be involved in the management of business as well. On the other hand, “limited partners are essentially investors (silent partners, so to speak) who do not participate in the company’s management and who are also not liable beyond their investment in the business. ” (Encyclopedia of Business)

There are some significant advantages of partnerships, which are as followings: collaboration, simple structure, easy to set up, taxation and flexibility. However,as a cion has two sides, disadvantages do exit as well. Initially, partners may get conflict and disagreements among themselves. Secondly, for general partners, the problem associated with unlimited liability is the other drawback. As the partnerships become bigger, the individual owner would face more risks. As a form of business organization, limited liability companies (LLCs) is a hybrid of corporation and partnerships.

The limited liability company could be the most commonly-used business entity. “Private companies, with the suffix ’limited”, are the most common form of company (over 95 per cent of all companies). The less numerous, but more influential, form of company is a public limited company. ” (Arnold. G, 2007) For one thing, like owners of partnerships and sole proprietorships that have been mentioned in the preceding part of this text, it is suggested that limited liability company owners would report profits or losses of the business on their personal income tax returns. For another thing, like owners of a corporation, however, all limited liability company owners are protected from personal liability for business debts — a feature known as “limited liability. “

Moreover, there are quite a lot of advantages of forming a limited liability company. 1) Different choices of tax regime. A limited liability company could choose to be taxed as different objects, such as sole proprietor, partnership or corporation, which provides quite an amount of flexibility. 2) “Limited liability means that ordinary shareholders are only liable up to the amount invested or have promised to invest in purchasing shares” (Arnold.G, 2007) and members are protected from liabilities for acts and debts of the limited liability company depending on laws of different regions.

3) Pass-through taxation that also means no double taxation, which is similar with a sole proprietor or partnership. 4) “LLCs offer unlimited membership like a C-corporation, and less formalities unlike a C or S-corporation. ” (Arnold. G, 2007) Contrastingly, there are some disadvantages of forming a limited liability company. 1) Because the system of the limited liability company has some personal company’s characteristics, shareholders might use the company business for their private uses, which would cause some individual shareholder abuse the company’s rights and evade responsibility and risks.

2) Transfer of capital contribution which usually requires the agreement with other shareholders is not as easy as transfer of shares. For shareholders, it is not advantageous to the flexibility of their investment. Conclusion It has been shown clearly that structures and forms of different business entities. However, the way to judge which business entity is the most effective is quite subjective among individuals.

Compared among sole proprietorship, partnership and limited liability company, it could be seen that both sole proprietorship can be easily and instantly set up and their business structures are quite simple. However, for sole trader and general partners, they are liable for all of the debts and losses. Because of the structure, they could not become more complex business with higher profit. In contrast, most famous successful companies are limited liability companies due to their clear structure, more investment to make the company bigger, detailed agreement of decision-making among shareholders and various choices of tax regime.

In The Modern Law Review, the author suggests that: ”Limited liability is widely regarded as a mechanism that encourages entrepreneurship and makes a major contribution to the law of business organizations. Popular and political sentiment proclaim:’ the more limited liability the better’. ” (Freedman. J, 2000) In conclusion, it can be significantly shown that the limited liability company is the most effective business entity. References Arnold. G. (2007). Essentials of Corporate Financial Management. 1st ed. Edinburgh: Prentice Hall Financial Times. D. , W. P. (2011). The Business Environment.

2nd ed. Oxford: Oxford University Press. Encyclopedia of Business. (n. d. ). Partnership[online]. Available from: http://www. referenceforbusiness. com/small/Op-Qu/Partnership. html [Accessed 24th October 2014] Entrepreneur. (2005, May 5). The Basics of Sole Proprietorships. Reference for business[online]. Available from: http://www. entrepreneur. com/article/77798 [Accessed 24th October 2014] Freedman. J. (2000, 5). The modern law review. Limited Liability: Large Company Theory and small firms , 3, p. 317.

Government of westen Australia. (2014, 9 29). How do I register my business name? Small business[online]. Available from: http://www. smallbusiness. wa. gov. au/step-3-how-do-i-register-my-business- name/ [Accessed 24th October 2014] Presti. A. (2013, 3 18). What are the pros and cons of limited liability companies (LLCs)? PRESTI&NAEGELE[online] Avaliable from: http://pntax. com/faq-what- are-the-pros-and-cons-of-limited-liability-companies-llcs/ [Accessed 27th October 2014] UPA. (1997). Uniform Partnership Act. Uniform Partnership Act[online]. Avaliable from: http://www. uniformlaws. org/shared/docs/partnership/upa_final_97. pdf [Accessed 24th October 2014].