This is the simplest form of business organization with the least level of regulation. It is managed by the owner who controls the profits and the tax issues of the business. The proprietor controls every bit of the business till death after which the business can be inherited by family members.
There is flexibility involved since the owner is capable of shifting to any business of his/her choice, provided there are benefits in terms of tax payment on assets (Ward 1). One of the advantages of this legal structure is that it is easy to start since it requires low capital. This entity sometimes does not even require registration at the start depending on location. Registration is however cheaper as compared to other legal structures.
The business tax is charged based on the same personal income tax form of the owner. Disadvantages of this structure are that the security of the entity is prone to risk due to poor decisions made by the proprietor. The owner assumes all the responsibilities of the business including debts which sometimes prove to be tedious. Failure to settle debts can lead to disposal of personal assets for the purposes of clearing the debts. The disadvantage of this kind of legal entity is that all the assets face the risk of being disposed after the owner’s death. The business is further risky when facing any kind of law suit, since this may lead to disposal of all assets related to the proprietor. The proprietor faces a lot of liability risks which calls for registration of several insurance policies to ensure safety (Ward 1).
This is the situation whereby two or more people come together with the aim of doing a business.
Each partner within this coalition has got the right to exercise control over management of the affairs of the business. This is defined by the level of each partner’s investment within the coalition. The liabilities of the business are equally shared amongst the partners, even if only one of them is the cause of the mistake. To avoid unnecessary risks all the people involved in the partnership register their business as a Limited Liability Partnership with the government.
The personal tax liability of each partner is determined by the ratio of the partner’s share of income and losses from the firm (Ward 2).
This is the legal structure whereby one contributes with minimal involvement in the activities of the business. Limited partners are never involved in the management of the business entity; the liability of limited partner to the firm is based on individual’s percentage of investment in the business (Ward 2).
This is the type of entity that runs in more similar way as a corporation.
Its operations lie in between partnership and corporation since its ownership is by either one or more members. The owners are considered the interest holders who exercise full control over the management decisions. The contributions of the members cannot be easily lost since the entity runs its business even after the withdrawal of some shareholders. The business is governed by some kind of agreement which determines the characteristics of the LLC including rights and powers of members and administration team (Ward 2).
In this case the liability burden experienced on sole proprietorship is reduced. The working relationship amongst the partners forms the strength of these partnerships. The success of these partnerships is based on the willingness of its members to share freely decisions and different talents they posses. In this legal structure, overall tax returns are not signed twice but done based on the financial information of the partnerships and individual income of the partners.
It is easier to challenge any wrongful decision or act by any of the partners, one partner can be held responsible for any wrong move. One of the disadvantages is that partnerships can always turn disastrous especially when the partners want to dissolve the business (Ward 2).
This type of legal entity is where the ownership is separated from its shareholders who happen to be the true owners of the business. However, the business entity under corporation continues to operate irrespective of the status of its owners.
This type of entity comprises of the management board which include shareholders and board of directors who are appointed by the owners. In this kind of business, it is not possible to recover debts from the management team. It is the shareholders responsibility to pay debts and repay loans owed by the corporation (Ward 3). One of the characteristics of this entity is that none of the members can be held responsible for any kind of losses. This makes it one of the most expensive and difficult businesses to run and operate. It is easier for the individuals to enter into contracts using the general name of the corporation and also members’ liability is restricted to the level of shares held by each individual (Ward 3).
The level of personal liability involved in any kind of legal structure makes it very unfavorable to many. Different levels of taxation determine the choice of business legal structure by individuals or groups. It is always the responsibility of business owner to decide on the type of business structure that best answers his/her desires. Other factors affecting the choice of legal structure include corporate formalities and finances.
Ward, Susan. “Choosing a form of business ownership”. New York Times, 2010