Law_531__Legal_Forms_of_Business

Legal Forms of Business When considering the preferred legal form of business, it comes down to the level of liability, the size of the business and the number of owners or shareholders that will be involved. It is important to consider that with the increased size of a business and the increase in the number of owners, the decision-making process becomes more complex. The level of liability for the owners decreases as the owners no longer are liable for the losses and gains of the business within larger legal forms of business. Of the legal forms of business; sole proprietorship, partnership, limited liability partnership, limited liability company, S corporation, franchise, and corporate; some businesses may only qualify to be classified as one or two of the legal forms of business, making the decision easier for the owners to choose. Sole proprietorship: A sole proprietorship is a for-profit business owned by one person who may operate the business alone or employ others. The sole proprietor of the business is responsible for assets, losses, and debts. There is also no legal distinction between the sole proprietor and the business (Cheeseman, 2012). A small business, such as a coffee shop would be a prime candidate for a sole proprietorship. The owner could run the coffee shop alone or employ others to operate the business. A sole proprietorship can be more difficult to raise long-term capital for, because of unlimited liability and that the business depends on the health of the owner. An investor takes on a higher risk when funding a large amount for a sole proprietorship. This type of business has low overhead and startup costs associated with opening and operating it, making it easier to secure the minimal capital necessary (Cheeseman, 2012). Partnership: A partnership is a business owned by two or more individuals who each have unlimited liability for the assets, losses, and debts incurred by the business. The losses and gains are divided according to the percentage of capital invested by each member of the partnership. A good example of a partnership would be a chain of coffee shops. This type of business would require more capital to open and operate initially. More than one individual contributing to the capital and operations would be needed with a larger business. It is also beneficial to have a team of individuals who can work together to make decisions for a business of this size (Cheeseman, 2012). Limited liability partnership: A limited liability partnership is a partnership that protects its owners against personal liability for certain partnership liabilities. A good example of a business that would fit well as an LLP would be a small massage studio that is owned and operated by two or more individuals. This form of business would work well as an LLP because the owners are protected against personal liability outside negligence and wrongful conduct. The level of protection against personal liability does depend on the state in which the business operates; however, most states protect at least against tort claims (Cheeseman, 2012). Limited liability Company: A limited liability company is a combination of a partnership and a corporate structure that provides limited liability to its owners and can be either for-profit or nonprofit (Cheeseman, 2012). A real estate company would be a good candidate for this type of business entity. Each property is owned by an individual LLC. This would protect the owner and other properties from cross-liability (Hannigan, 2003). S corporation: A S corporation is a business that chooses to operate like a corporation through its shareholders; allowing it to avoid double taxation on its income. This type of business also provides protection from liability for its owner by separating the owner’s personal assets from the business assets. These business types are limited to 100 shareholders. Due to the investment power of having up to 100 shareholders and the ability not to be double taxed, a good example of a business that would work well as a s corporation would be a small chain of bakeries that has between 75-100 shareholders invested in the success of the business (Hannigan, 2003). Franchise: A franchise business is one that operates under a trade name and business model that is already established by a parent firm. This type of business often pays a fee to the parent firm to use the trade name, products, marketing, and established success. A fast food restaurant is a great example of a franchise because it allows its owners to start an established business under a successful parent firm who invests in research and development of the products it sells, the advertising campaigns it runs, and the training programs used. The success of a franchise restaurant depends partly on the successful foundation of the parent firm while allowing the owner or owners to make decisions that can either further build upon the success or stunt the success of the franchised business (Cheeseman, 2012). Corporate: Of the legal forms of business; sole proprietorship, partnership, limited liability partnership, limited liability company, S corporation, franchise, and corporate; choosing the appropriate one to match the appropriate business model can depend on many factors. The level of liability, the size of the business and the number of owners or shareholders are a few of the factors to consider when choosing the legal form of business (Cheeseman, 2012). Conclusion: When considering the preferred legal form of business, it comes down to the level of liability, the size of the business and the number of owners or shareholders involved. It is important to keep in mind that with the increased size of a business and the increase in the number of owners, the decision making process becomes more complex. The level of liability for the owners also decreases. Some businesses may only qualify to be classified as one or two of the legal forms of business, making the decision easier. REFERENCES Hannigan, B. (2003). Company Law. Oxford University Press. Cheeseman, H. R. (2010). Business law: Legal environment, online commerce, business ethics, and international issues (7th ed.). Upper Saddle River, NJ: Prentice Hall.