Forms Of Business Organizations - Research Paper Example

Forms of Business Organizations Decision on what type of business to start should is important as it determines the types of taxes a business will be required to pay and the decision making process. Under the federal law, there are several legal forms of business i.e. sole proprietorship, partnership, limited liability companies and corporations. Each of these business forms has its own advantages and disadvantages hence making it important to make the right choice of business form to make. This is the circumstance that has faced Alex, Bill, Carl, Devon and Xavier as they inherit the farm of their dad. This paper focuses on the advantages and limitations of each form business with the objective of helping the above named individuals make the right choice. Sole proprietorship Sole proprietorship is a business form that is owned by an individual or a family with the sole aim of earning the profits. The owner of the business has unlimited liability in the business hence the owner and the business is considered as a single entity. The advantages of a sole proprietorship includes the ability by the owner to make faster decisions, having the right to all the returns of the business and the ease in formation. Starting sole proprietorship business does not require complex legal processes and are subjected to very few legal requirements and taxation (Burns, 2007). These businesses only pay business permit taxes and other operational licenses. In addition, sole proprietorship benefits from the fact that they are not required to prepare proper accounting recorded that are filed to the government departments. The cost of running sole proprietorship business is therefore low as most of the services are offered by the owner and no technical expertise is needed. On the other hand, sole proprietorship businesses face a myriad of challenges that may limit their ability to operate and invest in some businesses. To begin with, this form of business face financing problems as they cannot easily access loans from financial institutions hence majorly depending on the owners savings. Most sole proprietorship businesses lack the technical knowledge and skills that are required to make decisions and evaluate investment decisions, something that has been responsible for the high prevalence of business failure (Hur, 2013). Moreover, sole proprietors have unlimited liability meaning that the business assets and liabilities cannot be separated from the owners and assets and liabilities. In the case of failure by the business to pay its creditors, the owners’ assets will be attached. In the case of the inheritance business, forming a sole proprietorship will not enable the four brothers realize their demands of having Xavier manage the day to day operation of the farming business. It will also be difficult for them to get the loan of $ 500,000 that is required for expansion since the business will not have much credibility. Moreover, sole proprietorship will not give them the ability to have limited liability on the farming business. General Partnership The second business form is partnership. Partnership is a form of business whereby two or more individuals come together and begin a business with the objective of making profits and sharing the returns as the partners shall determine. The partners contribute capital and expect their investments to earn profit (Mirza & Wilson, 2003). Decisions on how the business is operated is made by the partners in their meetings. Some of the advantages of this form of business includes the ability to raise more capital from the contributions of the partners, ease in decision making, no many legal requirements and the sharing of losses. Partnership businesses are not required to make complex returns to the government authorities hence there is ease in reporting. In addition, the partners can share claims and obligations that may arise from the creditors. As compared to sole proprietorship, partnership business have access to better funding from the financial institutions due to the ability of the several partners to guarantee in case of a loan. The partners as well share their skills and knowledge hence improving the quality of the decisions made. Furthermore, the federal law does not need partnership to make complex reports and technical disclosures hence no major costs involved. On the contrary, partnership businesses are unlimited liability businesses where the assets of the partners and that of the partnership is considered as one in cases where there are claims from the partnership vendors. In such circumstances, personal assets of the partners may be taken and used to settle the partnership obligation. Partnership businesses also face the limitation of having access to financing as compared to other business forms like private companies and listed entities. The business further face the challenge in decision making when compared with sole proprietorship as the input of all the partners may be needed to arrive at a decision (Salaman, 2001). Reaching an accord may therefore take some time. Finally, the fact that the partners share profits makes sole proprietorship preferred in some instances. Alex, Bill, Carl and Devon should not settle on this form of business given that they intend to have business where their liability is limited. In addition, they have no technical skills, knowledge and interest on farming business but expect to rely on the knowledge and experience of Xavier to continue with the business. Since partnership business will require constant input of the partners and their technical knowledge is key, they should not consider partnership as the most viable business form to operate. Finally, their objective of investing additional $500,000 may force them to demand a loan from a financial institution. This may not be very easy for the partnership given the risks involved. Limited Liability Company (LLC) The third form of business form is the Limited Liability Company. This is a form of business whereby the owners have limited liability and can have a maximum of 50 owners. Before increasing the number of owners, the consent of the existing members must be sought. In cases where there are claims against the company, the owners stand to lose only their investment in the business and their personal property cannot be taken to help make the settlement. Limited liability partnership has the following advantages: Protected assets: this form of business protects the owners who are not personally liable for the debts and liabilities of the companies. The creditors cannot therefore claim the personal assets of the owners in case the company defaults to pay their outstanding debts (Gale, 2007). Limited Liability Company does not taxes at the business level rather losses and profits are passed through to owners and reported as part of their personal income taxes. Taxes are therefore assessed and paid at the individual level. Limited Liability Company also has the advantage of having credibility of the business to external stakeholders including employees, vendors, customers, employees and financial institutions. The fact that the business makes formal commitment boosts its credibility hence attracting more business and boosting performance. Alex, Bill, Carl and Devon should therefore consider the advantage of having reliable customers and vendors to boost their operation in the farm business. Moreover, Limited Liability Company allows the owners to establish flexible management structures as agreed by the company owners. Day to day management of LLCs can be managed by either the owners or managers who are appointed by the owners as opposed to corporations which have to be managed by the board of directors. Additionally, LLCs has the advantage of limited compliance requirements and few restrictions. LLCs face fewer state-imposed annual requirements as compared with the listed corporations. Fewer restrictions also make it easier to operate LLCs. On the other hand, LLCs have some disadvantages which includes, the need to incur high formation expenses that includes preparing the articles of associations that are filled with the state and other payments made (Schwidetzky, 2009). It is therefore easier and cheaper to form and operate sole proprietorship and general partnership than LLC’s. Besides, it is always harder to transfer ownership in an LLC than with corporations which have their shares listed in the stock exchange. Corporations have the ability to sell their shares in stock exchange to increase their capital and get more financing (LLC’s 2009). With LLC’s the owners must approve decisions that are likely to alter the ownership percentage of the existing owners. In terms of precedents, LLC’s lack case precedents compared to those of corporations. In view of the advantages that are associated with LLC’s, I would therefore recommend that Alex, Carl, Bill and Devon form LLC to help them manage and continue with the farming business that had been started by their father. This is because LLC’s will allow them achieve most of their demands in the following manner: First, if they form LLC’s, they will manage to realize their interest of having limited liability in the business hence their personal property will be protected in case of claims from vendors. Secondly, through LLC, they will have the ability to enjoy the flexible management whereby they may decide to have Xavier manage the business because of the skills and experience earlier acquired when he was supporting their father in the farming business. The business form will further allow them have an opportunity to ventilate their concerns to the management and have their ideas incorporated in making the decisions. The third reason why a LLC will be desirable in the case of these four brothers is because this type of arrangement will allow them have the ability to acquire the loan of $500,000 from the bank due to increased credibility from stakeholders. This may not be very possible for a sole proprietorship and general partnership. A LLC will further enable them have the responsibility of determining additional persons to have ownership in the business. Since the four brothers would not like strangers to become owners of the business but rather have it remain a family business, a LLC is advisable as such powers are non-existed in case of corporations. Furthermore, their intention of having the business operated as a Christian business that respects the Christian beliefs and practices will only be feasible under LLC and not corporation. The final reason why there is need to have the farming business registered as a LLCs is the fact that it will reduce tax liability. A LLC enables the profits or losses to be passed through hence assessed on the owners personal income and filled in the members’ returns. LLC is thus ensures proper tax planning and lower tax burden. Corporations These is the most common form of corporation where owners have limited liability hence their personal assets are protected from creditors’ claims. This form of business has numerous stockholders who have the right to change ownership by selling their shared without the requirement to obtain consent from other stockholders. Corporations also have the advantage of perpetual existence as the death of stockholder will not result into termination of the business. Other advantages include the enhanced credibility, ease of raising additional capital through issuing new shares or obtaining a loan and tax benefits of having deductible tax expenses (Todd, 2011). The disadvantages of corporations include the need to comply with more legal formalities kike filing of annual returns, obligation to comply with more federal rules and regulations and the fact that it is expensive to form and operate compared with other business forms e.g. sole proprietorship and partnerships. Analyzing the advantages and disadvantages of corporations in light of the farming business of the four brothers, this form of business will not ensure be advisable as it will not meet the preferences of the owners. First, having a corporation will not give them the powers to determine the ownership and limit it to the members of the family. It will also not guarantee the adherence to the Christian beliefs and norms. Besides, having a C corporation will deny them the ability to determine the management of the business hence Xavier may not have the opportunity to offer his experience and skills. A C corporation demand that a board be constituted and the board will have the mandate of monitoring the operation by formulating policies and determining who to manage the business. Conclusion In conclusion, the form of business determines the manner in which the business will be operated and managed apart from determining the amount of taxes to be paid and other reporting requirements, It is therefore important that before a decision is made, the owners of the business should carefully analyze the merits and demerits of each business form in order to make decisions that will ensure their demands are met. Alex, Bill, Carl and Devon together with Xavier should thus select Limited Liability Company as it is the form of business that will ensure their interests and expectations are met and the business managed according to Christian values and God’s wish without engaging in unlawful operations. References Burns, P. (2007). Entrepreneurship and small business (2nd ed.). Basingstoke [England: Palgrave. Gale, C. (2007). The business of business law. Managerial Law, 49(1/2), 10-12. Hur, S. (2013). The business of corporate learning: insights from practice. Cambridge: Cambridge University Press. LLCs, LPs, S corps & C corps: choosing the best business entity for optimal results.. (2009). Mechanicsburg, Pa: Pennsylvania Bar Institute. Mirza, H., & Wilson, N. (2003). Emerging forms of organisation and ownership in Europe. International Business Review, 2(3), 221-222. Salaman, G. (2001). Understanding business organisations. London: Routledge in association with the Open University. Schneeman, A. (2007). The law of corporations and other business organizations (4th ed.). Clifton Park, NY: West Legal Studies/Thomson Delmar Learning. Schwidetzky, W. D. (2009). Just Do It, 62 Tax Law. Massachusetts. Todd, T. M. (2011). Multiple-Entity Planning to Reduce Self-Employment Taxes: Recent Cases Demonstrate the Pitfalls and How to Avoid Them. 13 Journal of Tax Practice & Procedure . Read More