Question

For a would-be entrepreneur, selecting the proper form of business organization is a very important first step in the process. After some consideration and an assessment of your skills and education, you have decided to start a medical billing service that will provide services to providers in the local geographical area. Ideally, you would like to service physicians, dentists and hospitals.

Determine which of the three forms of business organization (sole proprietorship, partnership or corporation) would be the most appropriate for your new business. Why did you select the form of business organization that you chose? Identify at least three things that should be taken into consideration when making this selection. (4 points)

Based on the form of business organization that you selected, answer the following questions:

a.     How easy or difficult is it to set up this form of business organization? (4 points)

b.     What type of liability do you have in this form of business organization? (4 points)

c.     What tax implications do you need to consider for this form of business organization? (4 points)

d.     What will happen to the business if something happens to you, the business owner? (4 points)

Answer 1

Sole proprietorship would be ideal for such a business. Since, the services would be provided in local area it is quite evident the scale of operations will be small and hence, you can rule out corporation. Also, as there are no other enterpreneurs involved partnership can be ruled out too. Only one person is willing to run the business so, sole proprietorship is suitable.

3 things which should be considered while making such a decision are:

1) Scale of operations: If scale of operations of business is huge corporation must be preferred otherwise sole proprietorship/partnership should be preferred.

2) Liability: In a corporation the liability is limited to the amount invested in the company whereas in general partnership and sole proprietorship the person(s) concerned have unlimited personal liability.

3) Existence: In case of corporation the business will continue to exist even if something happens to a CEO or a shareholder or a Board of director. But if something happens to sole proprietor or the partners the existence of the business can be in doubt.

A) Sole proprietorship is the easiest to set up. There are very few legal requirements to be made. Corporation is the most complex form of business organization. It is very difficult to start a company and even more difficult to wind up its operations.

B) Liability is unlimited in sole proprietorship. He/she would be personally liable for all the liabilities/debts of the business. Creditors can also bring lawsuits against him/her to settle the debts.

C) Sole proprietor can file his business income with his personal income tax return. Business income is not taxed separately in sole proprietorship.

D) The existence of business can be in jeopardy if something happens to the proprietor as he/she is the only owner/operator of the business. Sometimes the business may cease to exist if owner dies or gets permanently injured.