Business and Corporate Law

Although there is a systematic approach that entrepreneurs can follow when setting up businesses, the idea of establishing a successful entity always seems like a daunting task to many people. For example, there is no one size or structure that is perfect for all entrepreneurs since different people have various business needs and preferences. Moreover, various business entity structures, such as sole proprietorship, limited liability company (LLC), corporation, and partnership that entrepreneurs can choose from, have different statutory requirements for formation, personal liability and taxation, as well as benefits and drawbacks. However, there are many critical factors, such as start-up cost, taxation, liability, expansion opportunities, and operation costs, that must be carefully examined and taken into consideration before choosing a business structure. Therefore, the selection of appropriate business entity structure is extremely important for optimizing the value and profitability of any business organization.

Preferable Business Entity

I would choose a sole proprietorship among the most probable business entity structures that are available. Unlike corporations, limited liability companies, and partnerships, sole proprietorship is a very informal and simplest form of business entity due to few legal requirements that are needed when establishing it. According to Lynott (2017), sole proprietorship is easy to set up due to minimal capital and legal cost requirements, simple tax structure, and easy management of a business. Moreover, there are numerous reasons why a sole proprietorship would be an ideal business entity structure for my business. In particular, sole proprietorship is absolutely flexible, thereby providing great opportunities for cost negotiations and price setting with vendors. In addition, it is easy to obtain substantial revenues for personal use in cases of emergency from a sole proprietorship due to the absence of restrictions on merging business and personal assets. Moreover, it is not only easy to transition from a sole proprietorship to another business structure, but also, this type of business entity is easy to dissolve or sell to profit from its value. Therefore, I would select would be a sole proprietorship because of its numerous benefits.

Sole Proprietorship

A sole proprietorship is a common business structure where a single person owns and manages a business. According to the U.S Department of Commerce, the majority of small and medium size business in the United States are sole proprietorships (Lynott, 2017). A sole proprietorship is formed by selecting a unique business name and registering it with the federal, state, or local government to obtain the required business permits and licenses. Sole proprietorships have unlimited personal liabilities for owners since the business and personal assets as well as liabilities cannot be legally separated. In addition, sole proprietors` profits are taxed on their personal income tax returns. Sole proprietorships have numerous benefits, such as full control over the management of the business, minimum start-up costs and operation expenses, high profits from the business since the revenues are not shared, and easy winding up of the business to mention but a few. However, despite having some benefits, sole proprietorships also have various drawbacks, such as business owners being fully liable for all business debts and liabilities, limitations in raising business capital due to the lack of business partners, as well as limitations in the life of the business.

Partnership

Partnerships are among the simplest business entity structures that are formed between two or more people. In particular, business partnerships are established by selecting a business name and registering it, developing a partnership agreement that specifies the terms and conditions of the partnership regarding investment, profits, and management, and obtaining a bank account and employer identification number. The personal liability of all partners in a business partnership is unlimited since partners are jointly responsible for the debts of the business and actions of their partners unless the partnership is structured as a limited partnership. Moreover, the partners are taxed both personal income tax and self-employment tax except for instances where the partnership is limited. The disadvantages of partnership business structures include high risk of disagreements among partners, joint and severe liability of all partners in regards to business debts and other partners` actions, subjection of partners` income from the partnership to self-employment taxes, complexity of the business structure in relation to accounting and tax returns preparation (Swanson & Sansone, 2010). However, partnerships have numerous advantages, such as easy changing of the business` legal structure, availability of adequate capital, minimal external regulation of the business entity and profit, as well as losses are equally shared among the partners.

Limited Liability Company

A limited liability company (LLC) is one of the business structures that provide numerous benefits, such as more organizational flexibility than other business structures. In particular, a LLC is established by identifying a business name, creating and filing the articles of organization, preparing an operation agreement, and obtaining the required licenses and permits. In a limited liability company, personal assets of business owners are protected in cases of lawsuits and debts since a business is a separate legal entity, and the owners are not responsible for an organization`s liabilities. Although a LLC may not be subjected to corporate taxes, the members of a limited liability company pay personal income taxes as well as self-employment taxes. The benefits of a LLC business structure include substantial tax and capital allocation flexibility, few legal formalities, and limited personal liability of business owners (Maizes, 2012). On the other hand, the drawbacks of LLC business structure comprise subjection to self-employment taxes, government regulation, high operation costs, and difficulties in raising capital for the business since corporations cannot issue stocks.

Corporation

A corporation is a legal business entity that is separate from its owners. A corporation is established by the selection a business’ name, appointment of the organization`s directors, preparation and filing of articles of incorporation, creation of the organization`s by laws, holding a meeting of the board of directors and issuance of stock certificates to an organization`s investors, and obtaining licenses and legal permits. The personal liability of the owners of a corporation is limited since corporations have independent activity that is separate from its owners (U.S. Small Business Administration, n.d.). The profits of a corporation are not only are taxed to the corporation when they are generated but also taxed from the shareholders` income when the dividends are distributed. The advantages of corporations include a company`s perpetual life, easy capital sources and ownership transfer through selling organizational shares, as well as limited liability of business owners. However, corporations have numerous disadvantages, such as double taxation through corporate taxes and taxation of dividends, independent management of the organization that can result in mismanagement and corporate failure, and stringent legal requirements for a business.

Conclusion

In conclusion, selecting an appropriate business entity structure is critical in ensuring the efficiency and effectiveness of any business organization. The most preferable structure would be a sole proprietorship due to its flexibility that allows cost negotiations and price setting, ease of obtaining income from profits for personal use, minimal start-up costs, transition capabilities, as well as simple business formation and dissolution process. A sole proprietorship is established by one person who chooses and registers a business name with the government and obtains the legal permits and licenses that are required to effectively run a company. A partnership is formed between two or more people and entails creating a partnership agreement that provides investment, profit sharing, and management guidelines. The unique aspect in a limited liability company (LLC) business structure is the preparation and filing of operation agreement and the articles of organization. The main characteristics of corporations include double taxation, separation of ownership from management, limited liability, and raising of capital through selling of the shares.

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