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ASSIGNMENT: Please respond to the following: Define the following types of business ownership. Sole Proprietorship Partnership...

ASSIGNMENT:

Please respond to the following:

  1. Define the following types of business ownership.
    • Sole Proprietorship
    • Partnership
    • Corporation
    • Limited Liability Company
  2. For each of the types of business ownership listed in #1 above, list the pros (advantages) and cons (disadvantages). Be sure to pay close attention to liability and tax treatment for each type of business ownership.
  3. If you were starting a new business, which of the five types of business ownership listed in #1 above would you choose? Why? Before you make a decision, review your pros/cons list for each type that you prepared in #2. To maximize your grade, be sure to provide detailed support for your choice.  

Requirements:

  • Minimum Page Length – 2 full pages

Solutions

Expert Solution

Particulars

Meaning

Advantages

Disadvantages

Sole Proprietorship

The sole proprietorship is a popular business form due to its simplicity, ease of setup, and nominal cost. A sole proprietor need only register his or her name and secure local licenses, and the sole proprietorship is ready for business. A distinct disadvantage, however, is that the owner of a sole proprietorship remains personally liable for all the business's debts. So, if a sole proprietor business runs into financial trouble, creditors can bring lawsuits against the business owner. If such suits are successful, the owner will have to pay the business debts with his or her own money.

The owner of a sole proprietorship typically signs contracts in his or her own name, because the sole proprietorship has no separate identity under the law. The sole proprietor owner will typically have customers write checks in the owner's name, even if the business uses a fictitious name. Sole proprietorships can bring lawsuits (and can be sued) using the name of the sole proprietor owner. Many businesses begin as sole proprietorships and graduate to more complex business forms as the business develops.

  • Owners can establish a sole proprietorship instantly, easily, and inexpensively.
  • Sole proprietorships carry little, if any, ongoing formalities.
  • A sole proprietor need not pay unemployment tax on himself or herself (although he or she must pay unemployment tax on employees).
  • Owners may freely mix business and personal assets.
  • Owners are subject to unlimited personal liability for the debts, losses, and liabilities of the business.
  • Owners cannot raise capital by selling an interest in the business.
  • Sole proprietorships rarely survive the death or incapacity of their owners and so do not retain value.

Partnership

A partnership is a business form created automatically when two or more persons engage in a business enterprise for profit. Consider the following language from the Uniform Partnership Act: "The association of two or more persons to carry on as co-owners of a business for profit forms a partnership, whether or not the persons intend to form a partnership." A partnership--in its various forms--offers its multiple owners flexibility and relative simplicity of organization and operation. In limited partnerships and limited liability partnerships, a partnership can even offer a degree of liability protection.

Partnerships can be formed with a handshake--and often they are. Responsible partners, however, will seek to have their partnership arrangement memorialized in a partnership agreement, preferably with the assistance of an attorney. Because partnerships can be formed so easily, partnerships are often formed accidentally through oral agreements. A partnership is formed whenever two or more persons engage jointly in business activity to pursue profit.

  • Owners can start partnerships relatively easily and inexpensively.
  • Partnerships do not require annual meetings and require few on-going formalities.
  • Partnerships offer favourable taxation to smaller businesses.
  • Partnerships often do not have to pay minimum taxes that are required of LLCs and corporations.
  • All owners are subject to unlimited personal liability for the debts, losses, and liabilities of the business (except in the cases of limited partnerships and limited liability partnerships).
  • Individual partners bear responsibility for the actions of other partners.
  • Poorly organized partnerships and oral partnerships can lead to disputes among owners.

Corporation

The term corporation comes from the Latin corpus, which means body. Historically, in England, the term corporation was also used for the local government body in charge of a borough. A corporation is a body--it is a legal person in the eyes of the law. It can bring lawsuits, can buy and sell property, contract, be taxed, and even commit crimes.
Its most notable feature: a corporation protects its owners from personal liability for corporate debts and obligations--within limits.

A corporation has perpetual life. When shareholders pass on or leave a corporation, they can transfer their shares to others who can continue a corporation's business. A corporation is owned by its shareholders, managed by its board of directors, and in most cases operated by its officers. The shareholders elect the directors, who in turn appoint the corporate officers. In small corporations, the same person may serve multiple roles--shareholder, director, and officer.

Corporations are ideal vehicles for raising investment capital. A corporation seeking to raise capital need only sell shares of its stock. The purchasing shareholders pay cash or property for their stock, and they then become part owners in the corporation. Of course, the sale of corporate stock is heavily regulated by the U.S. Securities and Exchange Commission and by state securities laws.

A corporation's shareholders, directors, officers, and managers must observe particular formalities in a corporation's operation and administration. For example, decisions regarding a corporation's management must often be made by formal vote and must be recorded in the corporate minutes. Meetings of shareholders and directors must be properly noticed and must meet quorum requirements. Finally, corporations must meet annual reporting requirements in their state of incorporation and in states where they do significant business.

  • Owners are protected from personal liability for company debts and obligations.
  • Corporations have a reliable body of legal precedent to guide owners and managers.
  • Corporations are the best vehicle for eventual public companies.
  • Corporations can more easily raise capital through the sale of securities.
  • Corporations can easily transfer ownership through the transfer of securities.
  • Corporations can have an unlimited life.
  • Corporations can create tax benefits under certain circumstances, but note that C corporations may be subject to "double taxation" on profits.
  • Corporations require annual meetings and require owners and directors to observe certain formalities.
  • Corporations are more expensive to set up than partnerships and sole proprietorships.
  • Corporations require annual fees and periodic filings with the state.

Limited Liability Co.

The limited liability company (LLC) is America's newest form of business organization. There is little historical precedent for LLCs. They are essentially creations of the state legislatures, although some commentators trace the origin of the LLC to a 19th century form of business organization called the partnership association, or limited partnership association. The great bulk of laws authorizing LLCs in the United States were passed in the 1980s and 1990s.

The LLC is often described as a hybrid business form. It combines the liability protection of a corporation with the tax treatment and ease of administration of a partnership. As the name suggests, it offers liability protection to its owners for company debts and liabilities.

  • LLCs do not require annual meetings and require few ongoing formalities.
  • Owners are protected from personal liability for company debts and obligations.
  • LLCs enjoy partnership-style, pass-through taxation, which is favourable to many small businesses.
  • LLCs do not have a reliable body of legal precedent to guide owners and managers, although LLC law is becoming more reliable as time passes.
  • An LLC is not an appropriate vehicle for businesses seeking to become public eventually, or to raise money in the capital markets.
  • LLCs are more expensive to set up than partnerships.
  • LLCs usually requires annual fees and periodic filings with the state.
  • Some states do not allow the organization of LLCs for certain professional vocations.

Choosing form of business depends upon situation, size, nature of business

For large type for business corportion is best way


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