Sample Business Paper on Business Ownership Structures

Forms of Legal structures

One of the most important decisions to be made when starting a new business is the choice of legal structure (Staff 2013). Legal structure or business ownership structure refers to a division of organization which is legally accepted in a specific jurisdiction and identified by the lawful definition of the category. There are various forms of legal structures namely: sole proprietorship, partnership, corporation, S corporation and Limited Liability Company (LLC) (Morgaine 2019).Sole proprietorship is a business ownership structure in which the business and sole proprietor are one legal entity. This means that the business lacks a separate existence aside from the owner. Sole proprietorship is the simplest form of legal structure. The owner has absolute authority over the business management and assets of the business are held under the owner’s name. A partnership refers to an arrangement between two or more persons or entities to act as co-owners of a business. The partners oversee business operations and share the profits and liabilities. A partnership is formed by either an oral or a written agreement between the partners and is considered a separate entity aside from the partners.

There are two types of corporations namely: C Corporation and S Corporation. The sub chapter part of the Internal Revenue Code gives the requirements connected with the two distinct types. A corporation is legally recognized as a separate entity aside from its owners. Ownership is determined by the ownership of shares of stock and the owners are referred to as shareholders or stockholders with limited liability. The C Corporation is associated with double taxation of income. That is there is taxation at the corporate level and taxation at the individual level. S corporation is not subject to double taxation. Taxation is only on the proportionate portion of income or loss of the stockholder. A limited liability company (LLC) is a legal entity in which owners have limited liability and it is recognized as a separate legal entity. Therefore, the LLC incorporates features from two legal entities that is the partnership and corporation. (Starr 2016) The owners in this case are called members.

Advantages and Disadvantages of the Forms of Legal Structures

The advantages of Legal structureinclude: the sole proprietor has absolute control of the business and makes all the decisions pertaining to it, it is relatively simple to dissolve and it is the least costly business form to organize. On the other hand, this form is disadvantageous in that the owner bears unlimited liability pertaining to the debts and responsibilities of this form. The sole control of the business by the sole proprietor comes in handy in the case of establishment of a small business. However, the unlimited liability clause may play against the owner in the case of a small business.

A general partnership is characterized by owners with unlimited liability.  Its advantages are: ease of establishment, the partners have control over the business and manage it, capital is obtained from the partners and not from a single entity meaning that there is a relatively wide capital base as compared to proprietorship. However, the partners are subject to unlimited liability and any decisions to be made concerning the business require input from all the partners (Starr 2016).These are the cons of this form of business. Under limited partnership, which has one or more general partners and limited partners with limited liability, the main disadvantage is that the limited members do not actively participate in the partnership since the liability is limited to their capital. It is important to note that this could also play out as an advantage. For a small business the main advantage is that there is a wider base for capital from the partners for both the limited and general partnership while the main disadvantage is the unlimited liability of general partners.

The pros of a corporation include: access to unlimited amount of capital raised, the owners have limited liability and a separate legal existence aside from the owners. The cons include: double taxation under the C Corporation, both the C and S form corporations have to follow many regulations and filing requirements as dictated by the state. Access to unlimited liability is the main advantage to a small business while double taxation under C Corporation is the main disadvantage to a small business (“How to Determine the Legal Structure of Your Business,” 2015). The main disadvantage of an LLC is that it is very cumbersome to form making it unsuitable for a small business. On the other hand, it has access to unlimited capital making it suitable for a small business, owners have unlimited liability and owners are involved in the management of the business.

Significant Advantages and Disadvantages

For a start-up and small business, the most significant advantage is the access to a wider base of capital so as to efficiently launch and manage it while for a medium to large business, the main advantage is the access to unlimited amounts of capital. The main disadvantage for a startup and small business is unlimited liability of owners while for a medium to large business, the main disadvantage is double taxation.

 

 

References

How to Determine the Legal Structure of Your Business. (2015, July 22). Retrieved from https://edwardlowe.org/how-to-determine-the-legal-structure-of-your-business/

Morgaine, B. (2019, February 13). The Complete Guide to Choosing Your Business Structure | Bplans, Retrieved from https://articles.bplans.com/the-complete-guide-to-choosing-your-business-structure/

Staff, E. (2013, February 19). Business Structure Basics. Retrieved from https://www.entrepreneur.com/article/75118

Starr, K. T. (2016). “I want to be my own boss:” Self-employment and legal business structures. Nursing201946(5), 14-15. doi: 10.1097/01.nurse.0000482274.49165.d1