Legal Forms Of Business Essay Example

hold property and incur debt in its name (Lee, 2011) Scenario – Running a large restaurant, which requires a large initial investment, may result in two or more individuals coming together to operate the business under a partnership. They plan to share the profits and liabilities of the business together and have no problems in owning the actions of other partners. They all want to be the part of day to day working of the business and mutually make decisions regarding running the business.

In order for each partner to be a legal equal partner, a partnership is the most suitable for this scenario. This allows each partner to feel protected if things go wrong and that they may take legal action against the other partners if things go sour. This form of organization is much easy to form than the other forms of partnerships. Limited Liability Partnership (LLP) A Limited Liability Partnership is quite similar to General Partnership, but with each partner is not liable for certain actions of other partners. LLP requires state registration and has adequate assets to satisfy potential claims (Nelson, 2008).

Scenario – Most doctors these days are part of a large clinic instead of a sole practice. In order to form a successful medical clinic, two or doctors come together to be part of the clinic and share the profits and losses of the organization. However, as practicing doctors, which has malpractices issues, they don’t want to share in each other’s personal liabilities. As partners they have equal share in the clinic and make decisions for the organization mutually. The limited liability form of partnership is very much preferred for this

type of business scenario.

Partners in this organization will share the profits and losses made by the business. However unlike, general partnership, in this form of organization, partners won’t be held personally responsible for each other’s actions. Also a LLP is not a separate taxable entity, therefore partners sharing profits or loss can show in their individual income tax. Limited Liability Company (LLC) A limited liability company as a form of business is a hybrid form of business, which has characteristics of corporations and partnerships. It can be opened by one or more people working together.

It is a separate legal entity like a corporation but for tax purposes it can be treated as a partnership; if members decide to do so. Owners of this business are known as members, not the stockholders or partners. It also limits a business owner’s liability (Nelson, 2008). Scenario – A landlord who has many real estate holdings has the potential of huge liability if something happens to a tenant in one of his properties. For this type of business scenario a limited liability company may be the preferred option. This allows the owner to build their business while keeping their personal liabilities to a minimum.

S Corporation S corporation is same as a corporate business with difference as how an owner can take the tax advantage. S corporate form of business allows its owners to be taxed like a partnership rather than corporate, even though the business is separate entity. Initially majority of businesses start as an S corporation to offset their losses on their income if any and can always revert to C Corporation when business begins to make taxable

income (Lee, 2011) Scenario – A person’s hobby can become a business option for many such as a freelance photographer.

By incorporating his or her business into an S-Corporation, they are able to take advantage of the “pass-through” tax which allows all the profits of the business to pass through directly to the shareholders’ tax returns. Therefore their business does not need to pay taxes and the freelancer takes tax advantage by being the owner and employee of the company. Franchise This form of business is quite similar to sole proprietorship and partnership type of business with difference here is that an individual or group has to get license to have right to trade and produce under a known brand name.

The franchisee benefits here are that they are associated with a much larger and known group, which help in quick start for the business. Licensing fee or Franchise fee depends on the name brand and franchise do have control on the merchandize. Unlike in sole proprietor and partnerships, the income from your franchise will be taxed in your corporation rather than on your personal return, and also can create a liability barrier between business and yourself, if things go wrong (Elgin, 2002). Scenario – If a person wants to get into the fast food business there are many options available to them.

However the fast food industry is a tough business and the best option for many is to utilize the franchise business option such as a McDonalds or Carl’s Junior. These franchises already have strong customer recognition and a consistent brand that consumers want. A franchise is usually a better option when a new business is

looking to open in an already over populated market. Corporate Form In the corporate form of business, the organization is a separate legal entity and its owners are called shareholders or stockholders.

A Corporation is governed by a board of directors and owners may change over time. During bad times and in the event of being sued, the corporation is sued instead of individual persons (Lee, 2011) Scenario – Generally when one thinks of a corporation, we think of major companies such as Wal-Mart, Verizon Wireless or Apple. With a large employee base and business interests in many different areas, these business which may have started with one person’s vision go beyond that person.

A corporation business model allows for protection of individuals, continued growth of the business and as well as a persona of having a significant strong presence in the business arena. Even some small businesses become corporate, to take advantage of tax rate that offers. Conclusion With the different forms and options of businesses, each business structure has their own advantage and disadvantages. In my opinion, when deciding which structure is the best for your business, it is good to consider all possibilities depending upon your situation and needs. References Elgin, J. (2002). Choosing a Legal Form for Your Franchise. Entrepreneur. Retrieved from http://www. entrepreneur. com/article/55206 Lee, T. (2011). Choosing the Legal Form of Ownership for Your Business. SBTDC. Retrieved from http://asbtdc. org/DocumentMaster. aspx? doc=2864 Nelson, S. (2008). LLC Kits & More. LLC VS LLP Explained. Retrieved from http://www. llcsexplained. com/Whats-the-Difference-between-an-LLC-and-LLP. htm Which Legal Form Is Best for Your Business? (2006). Inc. Retrieved from http://www. inc. com/articles/2000/06/19438. html