Introduction
There are many types of business organizations. Some of these are the sole proprietorship, general partnership, limited partnership, S Corporation, C Corporation, and Limited Liability Company. They have different characteristics. These characteristics will be an advantage or a disadvantage when compared with another type of business organization. The following paragraphs explain well the intricacies of the different organizational forms.
Body
Business Organization Forms
Differentiate forms of Business Organization.
Sole proprietorship – This is formed by only one person (Eads, 1991).
- Liability: The sole proprietorship has no limit in terms of liability. The owner will be forced to pay his outstanding business liability with the attachment of his business assets, personal assets, and future earnings power of the owner beyond his sole proprietorship business.
- Income taxes: The sole proprietorship owner pays the income tax generated from the business himself being the sole owner.
- Longevity or continuity of the organization: The sole proprietorship owner will decide when he or she will continue or close up the business. This organizational form’s owner has no fixed term limits because the owner of the sole proprietorship business can continue his or her business as long as he or she wants to without.
- Control: The owner of the business has ultimate control over important decisions. The owner of this type of business organization does not have to give a single percent of control to other persons.
- Profit retention: The owner of the sole proprietorship business owner does not give a single portion of the business profits to anyone. He receives the entire profits of the business entirely.
- Location: The owner of the sole proprietorship business has to apply for a new business permit and comply with all the business document requirements in each state he or she plans to set up.
- Convenience or burden: The sole proprietorship has the least cost and requirements in terms of complying with reporting, meeting, and other regulatory requirements. For, the sole proprietorship does not have to sign a partnership agreement with an outside person.
General partnership
This is formed by two or more persons as general partners. The partners contribute their money, property, or industry into a common fund with the intention of dividing the profits among themselves using a pre-agreed profit and loss sharing ratio. Each of the general partners is limited to their pre-agreed percentage in terms of liability. Each of the general partners is required to pay their percentage share of the company’s liabilities from their share of business assets, personal assets, and future earning powers of the general partner behind the general partnership business based on. This sharing of partnership liability is set forth in the pre-agreed partnership agreement.
Liability
The general partner has no limit in terms of liability. The owner will be forced to pay his outstanding business liability with the attachment of his business assets, personal assets, and future earnings power of the owner beyond his sole proprietorship business.
Income taxes
What are the features of each business entity that affect the amount of federal, state, and local income taxes paid by the business and/or owners?
The partnership itself will not pay taxes. Instead, the net income of the general partnership will ‘flow through’ to the individual partners. The individual partners will pay the taxes as part of their individual income tax returns.
Longevity or continuity of the organization
What features of each form relate to the forced dissolution of the business organization?
The partnership is dissolved if one of the partners dies, retires, or resigns. A new partnership has to be formed each time a death, retirement, or resignation of one of the partners.
Control
Who has ultimate control over important decisions? How much control does the owner have to grant to others?
Each of the partners has control over important business decisions based on a pre-arranged partnership agreement. Each of the partners grants control to the other partners based on a pre-arranged partnership agreement.
Profit retention
What portion of the profits does the owner have to give up because they have to be shared with others? How does this affect the return on investment?
One partner gives up a portion of the entire partnership profits to the general partners based on a pre-arranged partnership agreement. The return on investment of each partner is varied because the profits are distributed based on a pre-agreed partnership agreement. For example, partner A will get 10 percent of the entire net profits even though his investment is twenty percent of the entire partnership capital of 20,000.
His return of investment is arrived at by dividing his net income partnership share of $2,000 by his partnership investment. His partnership investment is $4,000. The return on investment is 50% arrived at by dividing $2,000 net income partnership share by the investment of $4,000.
Location
What are the implications for moving or expanding the business into a different state? Will a separate legal entity have to be created or new documents filed in the new state? Are there advantages or disadvantages regarding how state taxes will be assessed?
Convenience or burden
There are no additional requirements or extra workload placed on the general partnership to comply with all reporting, meetings, and other regulatory requirements. A partnership can be formed by mere oral agreement. However, it is preferable to sign a written partnership agreement to avoid misunderstandings between the partners in the future.
Also, the General Partnership must file with the secretary of state of each state in the United States submitting their Articles of Partnership which varies from one state to another. In addition, the filing fees for filing the Articles of Partnership differ from one state to another.
Limited partnership
– This is formed by two or more persons where one or more general partners and an al partners. The partners contribute their money, property, or industry into a common fund with the intention of dividing the profits among themselves using a pre-agreed profit and loss sharing ratio. Each of the general partners is limited to their pre-agreed percentage in terms of liability. Each of the general partners is required to pay their percentage share of the company’s liabilities from their share of business assets, personal assets, and future earning powers of the general partner behind the general partnership business based on. This sharing of partnership liability is set forth in the pre-agreed partnership agreement.
Liability
What are the limits on liability and protection of not only business assets, but personal assets and future earning power of the owner beyond this particular business?
The general partner in a limited partnership has no limit in terms of liability. The general partner will be forced to pay his outstanding business liability with the attachment of his business assets, personal assets, and future earnings power of the owner beyond his limited partnership business. On the other hand, the limited partner is limited to pay the liabilities up to the maximum amount of his or her personal investments. The limited partner is never liable to pay the partnership liabilities from his personal assets and future earning power of the limited power beyond the limited partnership agreement he or she has entered into.
Income taxes
The partnership itself will not pay taxes. Instead, the net income of the general partnership will ‘flow through’ to the individual partners. The individual partners will pay the taxes as part of their individual income tax returns.
Longevity or continuity of the organization
The limited partnership is dissolved if one of the partners dies, retires, or resigns. A new partnership has to be formed each time a death, retirement, or resignation of one of the partners happen.
Control
Only the general partner can have control of the important decisions of the business. The limited partner cannot participate or control the day-to-day business activities. The limited partner only shares in the profits of the business.
Profit retention
The limited partners are entitled to a share of the limiter partnership profits based on a pre-agreed partnership agreement. Generally, the computation of the profit distribution is similar to the general partnership organization above. To reiterate, a limited partner’s return of investment is arrived at by dividing his net income partnership share of $2,000 by his partnership investment. His partnership investment is $4,000. The return on investment is 50% arrived at by dividing $2,000 net income partnership share by the investment of $4,000.
Location
The Limited Partnership must file with the secretary of state of each state in the United States submitting their Articles of Partnership which varies from one state to another. In addition, the filing fees for filing the Articles of Partnership differ from one state to another.
Convenience or burden
There are no additional requirements or extra workload placed on the Limited partnership to comply with all reporting, meetings, and other regulatory requirements. A partnership can be formed by mere oral agreement. However, it is preferable to sign a written partnership agreement to avoid misunderstandings between the partners in the future.
C-corporation
Liability
The C Corporation is treated as a corporation under state law. Therefore, the stockholders of the C Corporation have a liability limitation up to the maximum amount of their personal investments. This means that the stockholders of the C Corporation are never liable to pay the Corporation’s liabilities from their personal assets and future earning power of the C Corporation stockholder beyond their investments.
Income taxes
The C Corporation is taxed based under the federal income tax law under Title 26 U.S.C. §11 and also Title 26 §301. One disadvantage of C Corporation is double taxation.
Longevity or continuity of the organization
The S corporation is formed as a corporation. Therefore the corporation will outlive a stockholder who dies, resigns, or retires.
Control
The ultimate control or management of the business is placed on the shoulder of the board of directors. The members of the board of directors are elected by the stockholders of the corporation. There is no limit to the issuance of outstanding shares.
Profit retention
The S corporation shareholders do not receive dividends. The stockholders will receive their share of the profits using his or her number of shares as a percentage of the total number of sales. The shareholder receives a dividend portion of the profits distributed by the corporation. If he owns ten percent shares of stocks, then he received only ten percent of the total dividend value of the total company net profits.
Location
The C Corporation must file with the secretary of state of each state in the United States submitting their Articles of Incorporation which varies from one state to another. In addition, the filing fees for filing the Articles of Incorporation differ from one state to another.
Convenience or burden
The C Corporation must file the Article of Incorporation and bylaws. It is composed of shareholders and directors. It also issues shares of stocks. This is the standard corporation. The C Corporation must file its own income tax return and pay the corporate income taxes. The C Corporation can issue two classes of stocks.
S-corporation (“S Corporation Reform Bill Introduced in Senate”)
Liability
The S corporation is treated as a corporation under state law. Therefore, the stockholders of the S corporation have a liability limitation up to the maximum amount of their personal investments. This means that the stockholders of the S Corporation are never liable to pay the partnership liabilities from their personal assets and future earning power of the S Corporation stockholder beyond their investments.
Income taxes
The net income of the business operation of the S corporation is tax-exempt under the Federal Income Tax Law. However, there are some exceptions to this general rule. The tax is imposed on the S corporation’s stockholders individually. Meaning, the stockholders have to file an income tax return separately as individuals. In terms of income tax computation, they are taxed under the partnership method because the S Corporation, itself, does not pay any taxes.
Longevity or continuity of the organization
The S corporation is formed as a corporation. Therefore the corporation will outlive a stockholder who dies, resigns, or retires.
Control
The ultimate control or management of the business is placed on the shoulder of the board of directors. The members of the board of directors are elected by the stockholders of the corporation. The S corporation is indirectly controlled by a maximum of one hundred stockholders and having one class of stock. An S corporation must either be a U.S. domestic corporation. An S corporation can also be a limited liability company. There is a limit to the issuance of shares of stocks.
Profit retention
The S corporation shareholders do not receive dividends. The stockholders will receive their share of the profits using his or her number of shares as a percentage of the total number of sales. The shareholder receives a dividend portion of the profits distributed by the corporation. If he owns ten percent shares of stocks, then he received only ten percent of the total dividend value of the total company net profits.
Location
The S Corporation must file with the secretary of state of each state in the United States submitting their Articles of Incorporation which varies from one state to another. In addition, the filing fees for filing the Articles of Incorporation differ from one state to another.
Convenience or burden
The S Corporation should be a domestic corporation. Thus, a Japanese company cannot form an S Corporation in the United States. The S Corporation must have a maximum of 75 shareholders. The S Corporation must file the Article of Incorporation and bylaws. It is composed of shareholders and directors. It also issues shares of stocks. The S corporation does not pay taxes but is passed through to the shareholders of the S corporation. S corporation has only one kind of share of stocks.
Limited liability company
- Liability: The members of the limited liability company have a liability limitation up to the maximum amount of their personal investments. This means that the members of limited partners are never liable to pay the partnership liabilities from their personal assets and future earning power of the owner beyond the investments they have in the limited liability company.
- Income taxes: The limited liability company is taxed similar to a partnership.
- Longevity or continuity of the organization: The S corporation is formed as a corporation. Therefore the corporation will outlive a stockholder who dies, resigns, or retires.
- Control: The members of the limited liability company elect the managers. The managers will control the day-to-day business operations. The owners of the business, also called the members, grant full control of the business to their elected managers. However, the members can remove the managers if they do not live up to the expectations of the members of the limited liability company.
- Profit retention: The profits will be divided based on a pre-agreed plan.
- Location: The limited liability company must file with the secretary of state of each state in the United States submitting their Articles of Organization which varies from one state to another. In addition, the filing fees for filing the Articles of Organization differ from one state to another.
- Convenience or burden: The members of the Limited liability Corporation do not need to meet regularly. They have limited liability in terms of debt. The members will report their profits and losses as part of their individual income tax returns. Non –U.S. citizens can invest in this type of business organization.
Conclusion
Recommendation of Business Organization.
The appropriate recommendation for a specific form of organization that should be used in the given situation here is the C Corporation. This is the most popular of the business organizations today.
There are many reasons why the best justifiable business form for this situation is the C Corporation. First, the five or more persons can invest more capital into the business than a sole proprietorship or a partnership of two or three persons can. Second, there is the ease in generating capital. Prospective investors can easily acquire shares of stocks in any corporation of his or her choosing. Third, is the creditors cannot run after the personal assets of the stockholders for the liabilities of the C Corporation. The stockholders of the C Corporation have a liability limitation equal to the maximum amount of their personal investments. This is what is called piercing the veil of the corporation.
Fourth, the customers and creditors would prefer to deal with the corporation than a sole proprietorship or the other forms of business organization. The reason for this is that the death or resignation of one stockholder or board of directors will not terminate the life of the corporation. On the other hand, the death of a partner cancels the partnership. Another advantage of the C Corporation is that it can issue two types of stock shares. The preferred stockholders will be prioritized in the distribution of dividends. The Common stockholders will receive their dividends only after the preferred shareholders have received their dividends.
References
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Cocheo, S. (1994). Texas Pioneers “Partnership Banks. ABA Banking Journal, 86(2), 88.
Eads, J. A. (1991). Practice Continuation Agreements; No Sole Practitioner or Small Firm Should Be without One. Journal of Accountancy, 172(4), 50+.
S Corporation Reform Bill Introduced in Senate. (1994). Journal of Accountancy, 177(2), 13+.
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