Business Organizations and Governance
Sole Proprietorship
A sole proprietorship is a form of business where one natural person owns and operates a business. It is the most commonly chosen type of business because it is the easiest to start. The sole proprietor has complete control of the business. The sole proprietorship has less paperwork and minimal legal fees. The law considers both the owner and the business as one entity. However, the business does not qualify to be a legal entity. It is because the sole proprietor is responsible for the business’ debts. Sole proprietorship operates under the name of the owner or a fictitious name such as Zuri’s barbershop. Generally, the sole proprietor is not an employee of the business and is not eligible for employment insurance benefits in case the business fails (Reinecke, 1984). The sole proprietorship has many advantages and disadvantages, including but not limited to tax implications.
Advantages
According to Haber et al. (1987), a sole proprietorship business gives the owner a chance to be the boss of the business and is not accountable to any supervisor or boss. Therefore, the owner makes business decisions without consulting anyone and is more flexible to end the business at any time. Moreover, the sole proprietor has the full mandate to implement business rules and regulations without the intervention of a third party. Generally, decision-making powers and control over the business enables the owner to form and wind up the business at any time.
Furthermore, the sole proprietorship has low start-up costs. It requires minimal costs and expenses because it does not need costly corporate taxes (Haber, 1987). Given that sole proprietorship may range from having no employees to having many workers, the business owner has no obligation over health care insurance coverage for the few employees it may have.
Lastly, Haber (1987) suggests that sole proprietorship form of business exhibits high flexibility and operations. The proprietor can easily manipulate the nature and scope of the business operations at any time. Additionally, expanding the business enhances the suitability of its operations in the changing business trends. For example, a sole proprietor running a clothing stall can decorate the stall as a strategy to attract more customers.
Disadvantages
The sole proprietorship has several distinct disadvantages. First, the owner of the business has limited capital. It is the obligation of the sole trader to raise capital to start the business. It implies that insufficient capital slows growth and the expansion of the business. Given that the owner is responsible for the business, they take all the financial threats such as debts incurred.
According to Reinecke (1984), in the sole proprietorship, there is no legal separation between the business and finances of the owner. As opposed to other forms of business, the proprietor’s money is tied to the business to the extent that they risk or lose personal assets when the business fails. The owner deals with financial problems alone because there is no separation from personal and business assets.
` Lastly, sole proprietorship lacks continuity in most cases due to insufficient managerial expertise. The success of such a business depends on the health and wellness of the proprietor. Therefore, in case the proprietor becomes ill or dies, the business closes down. On the other hand, the sole proprietor may lack the managerial expertise needed to run the business and thus result in poor planning, marketing, and administration.
Part Two
Partnership
According to Madura (2006), a partnership is a decision between two or more individuals to start a business by bearing its financial obligations and operations. This form of business presupposes that all partners have equal responsibilities in running the business, making decisions, and carrying out day-to-day operations of the business. An example of a partnership is the Google Company. Both Larry page and Sergey Brin met at Stanford while working on the same research project. Shontell (2016) argues that their partnership can be traced back to the time when they were working together on “The Anatomy of a Large-scale Hypertextual Web Search Engine,” term paper which later developed to Google.
In a partnership, there is a wider pool of knowledge and skills. For instance, both Sergey and Larry had similar technological backgrounds. Moreover, with more than one owner, partnership businesses have improved management. On the other hand, partnerships are potentially unstable because the decision-making is slow as it requires all members to agree first, therefore a business develops at a slow pace and become less competitive.
Unlike other forms of businesses such as limited Liability Companies (LLC), partnerships do not require the filing of documents with the state to establish legal agreements. However, parties may be required to fill and sign Partnership Agreements or Deed Partnerships to secure cooperation agreements (Madura, 2006).
Limited Liability Partnership (LLP)
In this form of business, the partners are not liable for debts the business is unable to pay even though parties may incur limited individual responsibilities. It means that all the liabilities are limited to personal investment in the business. Notably, all the obligations and profit shares are well documented in a limited liability agreement. Examples of successful LLPs include professional organizations such as physicians, attorneys, and architects. For example DLA (Doctors, Lawyers, and Attorney) piper offers protection from professional malpractice suits (Schwaighart, 2015).
Limited liability partnerships have great flexibility. Therefore, they allow partners to choose an investment plan which benefits them. Moreover, LLPs have less liability compared to a sole proprietorship. However, not all countries allow limited liability partnerships by restricting their operations. Another disadvantage of LLP is that it may result in diminishing credibility. Other forms of businesses do not recognize LLP as a credible form of business. Therefore, such businesses earn more respect than LLP.
LLPs are regulated by governments; thus, their formation varies with different legal forms. These include but not limited to liability partnership agreements, certificate of LLPs (certificate of registration), insurance plans, trade licenses, zoning, and health permits (Schwaighart, 2015).
Limited Liability Company (LLC)
Hamill (1989) defines Limited Liability Company as a hybrid structure with substantial features of a limited liability entity, tax efficiencies, and the overall operational flexibility of partnership forms of businesses. Shareholders of Limited Liability Companies are regarded as members consisting of a single, two, or more individuals and corporations. An example of a limited liability company includes Chrysler Company. The automotive company reorganized itself and adopted Chrysler Group LLC name in 2009. According to Hamill (1989), there is equal sharing of profit whereby all the members report profit and losses through individual tax returns.
Limited liability company members are protected from experiencing personal liabilities from the decisions made by the company. For instance, in the case of company debt, personal assets are exempted. Additionally, profits are distributed across depending on individual’s capital contribution and equity.
However, limited liability companies usually have a limited lifespan. When key members leave, the business is dissolved. In addition, members of this kind of business are considered as self-employed; therefore, they have an obligation of paying personal employment taxes. Incorporating a business to LLC requires formation of Articles of Incorporation and Organizations filed with a state agency.
S Corporations
An S corporation (S corp) is formed through an Internal Revenue Service tax (IRS) election. The Domestic Corporation becomes exempted from double taxation after requesting for the S corporation status. Before exemptions, all eligibility criteria are evaluated. An S corporation is different from other traditional corporations because profits and losses are allowed to pass through an individual’s tax return. Generally, these business forms are not taxed. There are several professions such as certified public accountancy, real estate agencies, and financial advisers which choose the S corp status. A notable example of the S corporation is the Bizzfillings. The online incorporation offers services at lower prices than the traditional lawyers do (James, 2016).
Given that S corporations have great management and organization flexibility, they are easily converted to C corporations, unlike LLCs. Furthermore, the payment of salaries and dividends is optional. Such flexibility has resulted in lower tax bills since the dividends are not subject to personal employment tax.
However, this form of business has strict qualification requirements, rigid profit, and loss allocations. Moreover, there are high chances of redundancy in corporate formalities. An S corporation is formed by complying with state incorporation statutes and submitting Form 2553 to Internal Revenue Service (IRS).
Franchise
This system involves the licensing of a third party to conduct business on behalf of the main franchiser in a particular region. The Franchiser provides the franchisees with operating systems, offer brands, support, and the chance to specify products under their marks. An example of a franchise is McDonald’s fast food franchise which develops, operates, and offers quality restaurants services. It offers four types franchising including the traditional restaurant, satellite location, Small Town Oil (STO), Small Town Retailer (STR) locations and Business Facilities Lease’ (BFL) franchise.
Franchises increase the success of the business by associating the business with proven methods and products. Moreover, it offers important pre-opening support such as financing, training, and the selection of sites. However, the franchisee is dependent on the franchiser and is required to operate the business according to the agreement details. Additionally, franchisees are expected to pay royalties, advertising fees, and have limited powers about the termination terms (“McDonald’s Franchise Cost & Fee, McDonald’s FDD & Franchise Information | FranchiseDirect.com.” 2016).
Two legal documents govern franchising. First, the franchising disclosure document (FDD) provides franchisees with agreement’s information to make an informed decision. Second, it is the franchise agreement which is more specific than FDD and includes information such as trademarks and products.
Corporation
According to Yeung (1997), a corporation is a legal entity owned by shareholders and therefore, the corporation itself is liable for debts which may be incurred. Yeung (1997) further argues that such corporations are the most complex forms of business due to high administrative costs, taxes, and legal requirements. As an entity, investors buy shares of stocks to own it.
Corporations have limited liability. The personal assets of shareholders are protected and are only held accountable for their investments in a company. Moreover, they have an advantage of generating capital through the sale of company’s stocks. By offering competitive benefits on stock ownership, corporations attract more potential employees.
However, most corporations are costly, offer double taxing, involve additional paperwork, and are time-consuming. The legal requirement for a corporation includes registration with the state, licensing from professional bodies, conforming to Articles of Incorporation, stock option agreements, stock purchase agreements, and attaining corporate status.
References
Haber, S. E., Lamas, E. J., & Lichtenstein, J. H. (1987). On their own: the self-employed and others in private business. Monthly Labor Review, 110(5), 17-23.
Hamill, S. P. (1989). Limited Liability Company: A Possible Choice for Doing Business, The. Fla. L. Rev., 41, 721.
Reinecke, J. A. (1984). Introduction to Business: A Contemporary View. Allyn & Bacon.
Shontell, A. (2016). 10 Super Successful Co-Founders, And Why Their Partnerships Worked. Business Insider. Retrieved 10 December 2016, from http://www.businessinsider.com/10-super-successful-co-founders-and-why-their- partnerships-worked-2010-7#larry-page-and-sergey-brin-1
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