Issue
Under the United States Constitution, five main businesses can be legally registered and allowed to operate in the country. The five businesses are sole proprietorship, limited liability company, cooperative, corporation, and partnership (American Bar Association of Corporate Laws 2008). Indeed, each of these businesses has its merits and demerits. Choice of the best form of business is entirely dependent on the intentions of the investor. As the primary investor, two goals should be a top priority return on investment and satisfaction of quality products offered. The suggested business, the manufacturing and sale of new computer software that will revolutionize the way people work are arguably, very profitable in the current economy. Technology has been embraced in all aspects of life. However, just because the product is a technological innovation does not guarantee its success. Therefore, the very first step to ensuring that return on investment and high-quality product manufactured is achieved is to form the best type of business. The paper will serve as a letter to Mr. Lithgow advising him on his best option regarding the type of business.
Rule
As mentioned, there are five business types that Mr. Lithgow can try out. Out of the five, the sole proprietorship is not advised as the client already has two business partners. Sole proprietorships involve only one investor. The other four options, limited liability company, cooperative, corporation, and partnership are all viable options. This section will evaluate the pros and cons of the four options.
Limited Liability CompanyAccording to Artz, Gramlich, and Porter (2012), in a limited liability company, shareholders possess no other liability apart from the price of their current shares and the remaining owing. In simpler terms, if the company gets into debt, each shareholder will bear the amount of debt equal to the number of shares the individual has, and if there is any balance left of the debt, it is divided equally among all shareholders (Slorach 2014). Mr. Lithgow has the option of opting for a single limited liability company. Since he is the sole cash investor, it would make sense for him to be entirely responsible for the company. In such a case, the losses or profits are not taxed through the company but through Mr. Lithgow’s personal tax return (Kirkus Reviews 2017).
There are several advantages of a single limited liability company. First, the sole shareholder earns more, especially if the company is making profits. The sole “owner” will, therefore, receive a salary based on the position held in the enterprise and also earn dividends through the shares held (100%). The shareholder will also have the option of opening up shares to be bought by other investors and also determine the amount each share will cost.
The second aspect of this option is the Partnership Limited Liability Partnership (PLLP). PLLP revolves around the different shares that the various partners hold (Leuciuc 2016). Each partner will be liable for debt equal to his/her shares. In the presented case, the other two partners are investing their time and effort into the start-up. An agreement can be reached on how many shares the two will hold. The advantage of this is that no one person will bear the full losses of the company.
Despite the many benefits of a Limited Liability Company, either sole or partner, some disadvantages can be identified. The main problem is that the shareholder who invests the most in the start-up bears the largest losses (Belyakov 2014). As the sole financier, therefore, the client will take a big chunk of the financial losses that will be experienced.
Cooperatives
According to Battilani and Schröter (2012), cooperatives require at least five members. In the given case, therefore, the three partners will have to identify and recruit two other members to be able to form the partnership. Topinka (2014) clarifies that a cooperative gives all members equal powers regarding decision-making. In such a business, the size of the investment is not considered. There are several advantages and disadvantages of such an agreement.
One advantage is that responsibility is equally shared among the partners (Reynolds & Curtin 2009). Since all partners are equal, they are all invested in making the company successful. It has been proven that majority shareholders tend to make decisions based on their status and not on their level of expertise. Cooperatives reject the premise by allowing each partner to have equal weight in decision-making. Due to its nature, cooperatives also force all partners to be active in their roles within the start-up. Therefore, it becomes easier for best practices and ideas to be shared. Also, the cooperatives pull in the different talents that the partners present onto one platform.
Despite the mentioned advantages, cooperatives, just like Limited Liability Companies, have several disadvantages. The first disadvantage is that cooperatives are not associated with profits. Johnson (2015) explains that cooperatives are often meant to offer services to the members who form it, and not necessarily, to act as a kind of business. Also, cooperatives give one vote to all members, including those who invested more in the company (Arnold 2009).
Corporations
Corporations are usually set apart from their owners. The premise means that shareholders are not liable for any loss made by the corporation as the corporation is viewed, by law, as an individual. Defined as a “legal person,” corporations that are in debt have to pay the debt through future profits or declare bankruptcy. However, to form a corporation, members have to also seek an insurance against bankruptcy so as to be able to pay debts when the need arises. Just like the two discussed types of businesses, corporations have their advantages and disadvantages.
The first advantage of corporations is that no shareholder is liable for the losses the company makes. Therefore, if the corporation does not perform as expected, the shareholders only lose their initial investment into the enterprise. Any debt that has accrued in the line of the corporation’s work will be written off as a bad debt. Also, Wilks (2013) confirms that the corporation, and its assets, can be sold to pay off debt. Any balance left after clearing of debt is equally divided among members, regardless of the amount of money that the individual investors put in at inception.
Another key advantage of corporations is that they can raise money through the sale of shares to the public (Tricker 2011). Getting a corporation listed in the stock market is easier than doing the same for the other companies. Also, the public has shown a keen interest in corporations than in the other companies regarding purchasing shares. The shareholders have the ability to also determine the price per share, making it a lucrative opportunity to earn extra income.
One disadvantage of corporations is that it takes some time to form (Slorach & Ellis 2016). The legal requirements needed are more compared to the requirements required to create the other companies. Also, corporations are taxed more heavily than other businesses. Becsky-Nagy and Noyák (2015) explain that this is so because the government taxes the corporation as a “legal person” and also taxes the individual shareholders through their personal tax returns.
Partnerships
The last viable form of business is partnerships. The Uniform Partnership Act of the USA defines a partnership “as an association of two or more persons to carry on as co-owners a business for profit” (Henning 2012). Important to note, the partnership adheres to the rules that are agreed upon by the shareholders. Therefore, the shareholders also have to agree on the sharing of profits and losses. There are several advantages of partnerships.
The first advantage is that it allows for the agreement of power. All shareholders will be involved in the process of understanding. The shareholder who invests the most (financially) is often given priority regarding chairing the partnership. Additionally, all involved have to agree to the set terms, draft the agreement, sign it, and have it notarized for the partnership to be legal. The ease of understanding also allows for changes and decisions to be made effectively (Cadena-Roa, Luna & Puga 2012). All the partnership needs to function is consensus and agreement. Joyce and Paquin (2016) also add that partnerships are quickly created compared to the other companies.
Morse (2004) adds that partnerships also enjoy unlimited liability. Thus, each can use other personal assets to pay off the debt accrued by the company. The individuals can also use their private assets to boost the company if they so desire. Again, such an action has to be agreed upon by all interested shareholders. Additionally, share distribution has to be approved by all and not left to one person.
Partnerships, however, also have some disadvantages. The biggest problem with partnerships is that they tend to be temporary. Amat and Perramon (2012) explain that such firms have shorter life periods compared to other companies. In many instances, partnerships dissolve, and one individual takes up the cause, changing the company into a sole or a limited liability company. Also, partnerships are often associated with friendships and go mainly by the trust. Due to this, making tough business decisions can be challenging as some partners might make decisions against them on a personal level.
Application
After a review of the five viable options, it is highly recommended that a partnership be formed. There are several reasons why this is suggested. The first reason being that the three partners will always have to agree on a cause of action before one is taken. Being the chief financer allows for some form of power in the partnership, albeit not an extra vote. Thus, the position of “chairperson” can be easily acquired. The position chair allows for overseeing activities and calling out of factors that might not be beneficial to the partnership.
Another factor that makes partnership the best option is the fact that decisions are based on agreements (Weintraub 2013). It is important to note, people who invest largely in a start-up often feel the need to control everything. In many instances, such actions do not help the company and can lead to its failure. A partnership does not allow for such and demands that decisions be made fairly, without bias from any one individual. Therefore, it can be argued that for start-ups, where each decision is crucial in the survival of the company and the product, partnerships are best.
Also, the fact that partnerships are easier to form allows for the involved to fully weigh each other and the contributions they each bring into the partnership without the pressure of time (Autry & Hall 2009). Technological software is time-sensitive as software changes often. The ease of registering the partnership and starting work allows for such a dire product to still be relevant by the time of release. Unlike corporations, partnerships are not taxed twice. Therefore, more money is saved and acquired. Before forming the partnership, however, some advice should be considered. To avert the challenges and limitations of partnerships, a written agreement detailing the nature of the partnership and the roles of all involved shareholders should be drafted and notarized.
Conclusion
There are four types of businesses that are viable for the venture. The four types are limited liability company, cooperative, corporation, and partnerships. Out of the four, partnerships are best suited for the enterprise at hand. One of the factors that make partnerships best suited is their flexibility. Decision-making is fully based on an agreement between the involved parties.
Also, roles held by the shareholders are deliberated and agreed upon based on merit. One of the disadvantages of partnerships is that they are associated with friendships and trust, such that touch decision-making can be perceived as malicious. To solve the challenges, it is important to agree from the word go that the business comes before the friendship and also to set disciplinary actions against shareholders who do not perform as expected.
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