Main Business Organizational Form

The forms of business organization, otherwise known as business entities, are critical for the functioning of the company in the modern economy. The type of business organization impacts elements such as taxation, legal liability, and investment possibilities. Oftentimes, the business entity also reflects the scope, size, and nature of the business, as well as the management structure that it legally and practically adopts (Perez, 2020). Selecting the form of business organization is the primary step that each new business must take upon registration.

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Compare and Contrast

Business Type Legal Liability for Owner
Sole proprietorship The simplest type of business form where one person is the owner and carries the full legal risk of the business. This form is not considered a legal entity so there is no legal distinction between the owner and the business, resulting in unlimited personal liability on the owner. It is possible to limit legal exposure, or at the least reduce damages if liabilities arise, through purchasing insurance, protecting major assets by switching the title to a relative, and working primarily with independent contractors for staffing needs, since legally the business is not responsible for damages by a contractor (U.S. Small Business Administration, n.d.).
General partnership The general partnership form is similar to that of a sole proprietorship, except two or more persons agree to share the assets but also the risks of the business. In this case, all partners share unlimited personal liability, meaning whatever the debts or legal risks acquired by the business, it is the responsibility for all partners to pay it off. Therefore, if one partner takes on business debt but cannot pay it off fully with their assets, the other partner’s assets are legally vulnerable to be sanctioned to pay off the debt. There is no means to limit legal exposure other than some methods for personal assets described in sole proprietorship. If there is an inherent difference in trust, vision, or even asset capabilities of the partners, the limited partnership may be the best form (U.S. Small Business Administration, n.d.).
Limited partnership (LP) Similar to a general partnership, an LP consists of one or more general partners that oversee and own parts of the company, conducting daily management of the company. And then there are limited partners, which do not participate in daily management, but still own parts of the business, being much like stakeholders. It is key that limited partners do not participate in management, as it nullifies their part a limited partner in most states. Limited partners do not have voting rights in the business usually and participate only in very large decisions for the business such as adding a partner, changing form, etc. From a legal standpoint, general partners are fully responsible for the business, having unlimited personal liability. Meanwhile, limited partners are fully protected, bearing no legal liability. To limit exposure, general partners should continue to insure and protect their assets and add other general partners only after careful consideration and vetting. Meanwhile, limited partners can avoid liability by adhering to state rules regarding participation in the business to ensure the limited partner status is maintained leaving them with no exposure (Rozario, 2018).
Corporation A corporation is formed when the business is declared a completely separate legal entity from its owners. After the business is incorporated, stock is issued to the company’s shareholders based on their ownership share/investment. Corporations are managed by a CEO and an elected board of directors which oversee day-to-day operations. While owners and shareholders may be part of that management, the corporation itself is a separate business entity that makes its own profit, pays debts, and taxed appropriately. Shareholder owners do not keep the whole profit but do get paid dividends based on their share. In terms of personal liability, a corporation offers arguably the strongest protection. Shareholders are not liable unless in some forms of corporations they co-signed or personally guaranteed the corporation’s debts. Otherwise, legally the corporation exists on its own and if there are any legal pursuits, they can only target the corporation not its shareholders. To limit exposure, owners of the corporation should strive to adhere to the state laws regarding incorporation to prove that the business maintains a corporate status (U.S. Small Business Administration, n.d.).
Limited liability company (LLC) An LLC is a mixture of the corporate and partnership business forms. It is a legal entity formed with the purpose of shielding the owner’s personal assets in cases of company bankruptcy or legal liability. However, in this structure, owners have the benefit of keeping the profit as personal income without facing the taxation and shareholder structure of corporations. LLCs typically have limited life spans since it legally requires to maintain the same ownership structure, and any changes (a partner leaving or being added) requires the LLC to be dissolved and reformed. Owners are protected from business debts and claims, standing to lose only the money directly invested in the company since only the LLC assets can be used to pay off claims. LLC owners can be held liable if they personally guarantee a loan (commonly a requirement from banks dealing with LLCs) and if there is personal liability for one’s own actions (such as illegal or incompetent conduct). Avoiding personal guarantees as well as ensuring there is no negligence, malpractice, or personal wrongdoing in actions surrounding the LLC are best means of avoiding legal exposure (Pătru, 2018).

Personal Business

A business that I would like to own is a chain of locations that specializes in renting electronics and equipment. This ranges from laptops and gaming consoles to instruments and yard tools. The mission would be to provide access to consumers for those things they may need urgently because they simply do not have one or theirs broke, but they do not wish to or do not have the resources to purchase a new item. The model would work that consumers would pay per day of leasing, with the cost depending on the total cost of the item. Consumers will also sign an agreement taking on responsibility and safety of using the item, and also bearing the cost of any damages and repairs to the item that may occur due to consumer actions or influence or while in their possession other than mechanical defects stemming from the object itself. The shops will keep a wide range of options in the inventory, focusing more on quality of items and consumer demand, thus with a shifting selection, but attempt to streamline as much as possible, potentially even having a shared warehouse among stores to move objects around as demand sees fit.

The best business form for this business would be an LLC for several reasons. It is planned to be a chain of small stores to serve a wide area of consumers, particularly in the suburbs, potentially being a franchise. This type of company will also require significant financial input and other partner stakeholders may be involved. An LLC is vital to protecting each owner’s assets and interests from liabilities that franchising activity might cause. It offers similar protections to that of a corporation, but remains much simpler and cheaper, and the business is likely to remain a small-medium sized business. Furthermore, the nature of the business of providing technology and power tools to consumers is one that is expected to face lawsuits. Despite consumers having to sign agreements to take full responsibility, it is likely that the business will face lawsuits in case of injury or other adverse events. An LLC further protects personal assets of the owners from the hostile lawsuits and any penalties that may arise, with the LLC assets bearing the cost of any debts or legal sanctions.

References

Pătru, R. S. (2018). Theoretical and practical aspects regarding limited liability companies. Challenges of the Knowledge Society, 283-287. Web.

Perez, W. (2020). What is a business entity? Web.

Rozario, R. X. (2018). Limited liability partnership: An effective alternative to complexity of incorporation and the personal risks associated with partnership law. International Journal of Research in Engineering, Science and Management, 1(10), 128-131. Web.

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U.S. Small Business Administration. (n.d.). Choose a business structure. Web.

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