Business Law – Organizational Forms.

Introduction

This paper seeks to differentiate one form of business organization from the others using at least six given characteristics. The distinctions will be expounded with brief discussion of advantages and advantages of each form of organization.

Analysis and Discussion

The forms of organizations, characteristics, advantages and disadvantages

The following are the forms of business organizations and the characteristics of each and a brief discussion of the advantages and disadvantages of each.

Sole proprietorship

The liability of the owner is unlimited — that is creditors can go after the personal assets of the owner if business assets are not enough to pay liabilities in case of insolvency. As to income tax, the owner is liable for self-employment tax for one’s income from the business but that the business entity is not liable for a separate income tax (AllBusiness.com, 2006).

As to longevity of the organization, the company may exist indefinitely but it would be at the advantage of the owner to file for bankruptcy if he or she becomes unable to pay debts out his or assets. As to control, the owner will have the sole power to do what he or she wants to do and the same may not be granted to the others.

As to profit retention, the owner can keep alone the profits since he or she has nothing to share with the same. This would definitely increase his return on investment because the owner could always reinvest profits any time.

Since the law on business organization of sole proprietorship is governed by state laws, the owner will have to adjust to the laws of the state where the business plans to expand to or operate. The entity would also need to have a separate registration and permits requirements from another state and be liable for any state taxes if any. There is however no need to have a separate juridical entity since whether there is expansion or not, the business organization and the owner are considered one legal person.

It advantages therefore may be viewed in comparison with general partnership, limited partnership in the case of general partners and C-corporation where the sole proprietor is sure controlling of the organization while enjoying simplicity of decision-making (Canada Business Network, 2008). In terms of taxation, it is better than C-corporation since the latter is taxed both from the entity level and the distributed profits to owners in the form of dividends. Its disadvantages compared to other forms include the unlimited liability of the owners where personal assets could be pursued by creditors.

General partnership

As to liability, the owners who are all general partners are liable beyond their capital distribution in case of insolvency of the partnership. As to income taxes, business partnerships are considered as flow-through entities for purposes of US Federal income tax under United States Code (Title 26, United States Code, n.d.). This implies that the entities are not liable to pay income taxes but their owners are liable on the share each from profits of the partnership.

As to longevity, general partnership may be dissolved in case of death or insolvency of any of the partners; hence their continuity could be limited. Remaining partners may however continue the business after dissolution under a new arrangement.

In terms of control, the general partners have voting and influencing power in terms of their interest in the partnership, thus the greater the interest, the greater the influence in the management and control of the business. As to profit retention, the partners normally have included as part of the partnership agreement how to divide their profits which may be based on their capital contribution or any profit sharing arrangement that they may agree into.

Partnerships are regulated by different states in the US hence a partnership planning to expand into another state must comply with the legal requirements of those other states. Since there is already a registered business name, the partners may choose the same registered business name in another state. A separate legal entity is not created in case of expansion as there would be the same owners.

Its advantages over that of sole proprietorship include the chance of raising bigger capital while its disadvantage compared to a corporation is the unlimited liability of owners or partners compared to stockholders.

Limited partnership

As to liability, the general partners have unlimited liability but the limited partners have limited liability up to their capital contribution. As income taxes, the partners are liable as in the case of general partnership where the entity is not taxable but the share of partners in the profits is subject to income tax. As to longevity, the life of the limited partnership may be dissolved also under the same grounds as general partnership and in addition, the partners’ failure to comply with certain requirements of the law.

The control of the business is normally given to the general partners who are in charged of the management of the business and who assume the greater risks in the organization as compared to limited partners. These limited partners are entitled to major decisions of the organization like the sale of all or substantially all of the assets of the organization. As to profit retention, the partners have made it part of their agreement how to divide the profits among themselves as in general partnership.

The location of the business on the business to other states in case of expansion will also be like the general partnership. The partners may choose the same registered business name in another state and a separate legal entity will not be formed since it will have the same owners.

Its advantages over that of sole proprietorship include the better source of capital from more owners while its disadvantage compared to a sole proprietorship is the lack of control in the management to limited partners.

C-corporation

As to liability, the owners or stockholders have limited liability to the extent of the amount of their capital contribution to the organization. As to income taxes, the C-corporation is subject to corporate income tax and in addition, the dividends distributed to the stockholders as share in the profits is also subject to tax. Thus in this form of organization, there is double taxation.

As to longevity of the organization, C-corporation has normally a fixed life under the law on corporation but the same is subject to renewal for another fixed term. The control of management is determined by those who hold a majority of the shares in the corporation since they would use their holding to elect the board of directors that manages the corporation day to day affairs. As to profit retention, the corporation’s board of directors determines whether there is basis to distribute dividends or whether there are good investment opportunities that would produce rates of return higher than its present cost of capital.

As to location, the corporation can also expand to other states without creating any new entity but the expanding corporation must comply with what the corporate law requires by the host state. Some corporation laws of other states may impose state taxes; hence the corporation must be ready to comply with the same.

The advantages of C-corporation over that sole proprietorship and general partnership include the limited liability of stockholders. It disadvantages compared to sole proprietorship is the uncertainty of gaining control if one is just a minority stockholder.

S-corporation

As to liability, the owner or owners have also limited liability since their liability is limited to capital contribution. As to income tax, the S-corporation is not subject to corporate incomes tax but only the share of owners in the corporation that would be subject to tax, hence there is no double taxation. As to longevity, the S-corporation has normally a fixed life subject to renewal.

The control operates as that of C-corporation where the majority of owners who hold the greater interest will normally have control of the S-corporation. As to profit retention, the portion of profits that would be distributed to shareholders would depend on what is decided by the majority of the shareholders. The implication of moving or expansion is the same at that of C-corporation where there is no need to create separate legal entity.

It advantages over that of sole proprietorship and general partnership is the limited liability of shareholders (Fishman, 2008). It disadvantages compared with C-corporation include the limited number of shareholders.

Limited liability company (LLC)

As to liability, all the owners all have limited liability. The limited liability may be enjoyed in sole proprietorship, a partnership or corporation which may be determined upon choice by the applicant. Thus the liability of the owners would depend on the kind of organization elected for the LLC (Internal Revenue Service, 2008).

In relation to choice made, the kind of income tax will also depend on the choice made. If C-corporation is chosen, the there will be double taxation but sole proprietorship, S-corporation of partnership is chosen, tax will only be imposed on the share of the owner in the profits.

As to longevity of the organization, the same will also depend on the choice made if it is sole proprietorship, partnership or corporation. As discussed earlier, the life of a sole proprietorship is indefinite as that of partnership but that of corporation has fixed life.

The control of the business will also depend on the choice made which could sole proprietorship, partnership or a corporation (Internal Revenue Service, 2008). As to profit retention, the share of profits with others will also depend upon the choice made and the implication must be the same as discussed for each particular type. Even the effects of the possible expansion of the business to other states will be governed by the consequences of choice of organization made whether sole proprietorship, partnership or a corporation.

It advantages compared to a limited partnership include the limited liability of all owners. Its disadvantages assuming the chosen LLC is partnership include the difficulty of raising capital compared to S-corporation or C-corporation.

Memorandum analyzing the findings

Each type of business organization has its own advantages and disadvantages and the applicability to one person or persons intending to adopt the most appropriate type would depend on the circumstances of the person or owner or owners including the nature of the business, the risks the owners are wanting to minimize and, the financial requirements needed and other business objectives that the owners wanted to realize.

After reading given facts of the case and relating same with characteristics, advantages and disadvantages of each form of business organization, the most suitable form of organization to be recommended to the owner is S-corporation. Case facts provide that the owner is concerned about possible liabilities in case of accident provided by sub-contractors and employees. The said conditions prioritize the need to be protected from liabilities. Among the form S-corporation is the most suitable. The owner cannot choose to become a limited partner of limited partnership just to limit his or her liability because limited partners cannot manage the business and would mean lose of control. The owner is also not ready to put up a C-corporation because of the possibility of losing also the chance to control the majority of the board of directors. Although it is possible to choose S-corporation and making it at the same as a limited liability company (LLC), the owner may be restricted unnecessarily to raise additional capital for expansion.

By adopting S-corporation as a form the owner will also avoid double taxation. Moreover the owner could benefit from the corporate losses being passed on in filing their personal income tax return. In addition, the owner has also the great chance of minimizing self-employment tax and FICA taxes (Harroch, 2006).

Conclusion

After a careful analysis of differences among the different forms of organization in relation to the conditions under which the owner of business presently has, it was found that S-corporation is the most appropriate to adopt. S-corporation basically is combining the flexibility of sole-proprietorship by avoiding double taxation and some of the advantages of a corporation particularly the limit on personal liability and the chance raising bigger capital easier than just remaining separately as sole proprietorships or forming a partnership. Although it has the disadvantages of more regulations and requirements demanded by compared to C-corporation and therefore more cost more as a result, these are offset by greater effect of the advantages to the present condition of owner as manufacturer of a variety of wood moldings, hardwood doors, high-end kitchen cabinets, etc.

References

AllBusiness.com (2006), Advantages and Disadvantages of Sole Proprietorships. 2008. Web.

Canada Business Network (2008) Forms of Business Organization. Web.

Fishman, S. (2008) Working for Yourself: Law & Taxes for Independent Contractors, Freelancers & Consultants, Nolo.

Harroch, R. (2006) Advantages and Disadvantages of C Corporation. 2008. Web.

Internal Revenue Service (2008) Limited Liability Company. Web.

Title 26, United States Code (n.d.), Internal Revenue Code, 2008. Web.