This paper outlines the various forms of business that one can choose from when planning to venture into commerce. The particular form that a business takes may significantly impact the business’ financial returns, capability and the risks that it is likely to encounter as it progresses. Each of these forms of business suits a particular scenario; there are different reasons that make each form to be preferred for a particular situation. These reasons are discussed in the paper. The most common legal forms of business that one can choose from include a sole proprietorship, a partnership, a limited liability partnership, a Limited Liability Company (LLC), an S-corporation, a franchise, and a corporate firm (Cheeseman, 2010).
A sole proprietorship is the simplest legal form that a business can take. In this form of business, the firm and the owner are treated as the same entity and are as a result, liable for tax and any other debts that the venture may incur. The formation of a sole proprietorship does not require so much paper work like in the other forms of business. The taxes charged on a sole proprietorship are very small. This venture is the most appropriate form of business for people who want to start a simple business with a small amount of capital. Since it does not require a lot of formalities during its formation, a sole proprietorship is considered the simplest form of business, which is the easiest to start and operate (Moore, 2008).
The second form of business, a partnership, refers to a business association of at least two people, whose main aim is to make a profit. A partnership, like the sole proprietorship, is considered the same entity as its owners. A partnership also does not require a lot of formalities during the process of its formation. All that one needs to do to obtain a license is to show that the business is formed by at least two owners. This form of business is appropriate in a situation where two or more people wish to form a simple business with an aim of profit making; it is easier to form and operate (Moore, 2008).
The third form is a limited liability partnership, which is closely related to a partnership. The main difference between a partnership and a limited liability partnership is the liability clause. Individual partners in a limited liability partnership are protected against most of the liabilities that the business may incur. Consequently, a limited liability partnership is suitable for people who want to form a business that is a separate entity from its owners. This implies that the owners of a limited liability partnership are not liable for the debts that are incurred by the business (Miller & Jentz, 2013).
The fourth legal form of business is a Limited Liability Company (LLC), which combines the characteristics of a limited liability partnership and a sole-proprietorship. It portrays the pass-through taxation characteristic of a sole proprietorship and protects the owners from liabilities incurred by the business. An LLC is not regarded as a separate entity; consequently, the business cannot assume taxes or losses. An LLC is the most appropriate form of business for people who wish to operate a company and at the same time enjoy the benefits of a corporation. An LLC operates almost like a corporation, but does not require the tedious formalities that are involved in its formation and running (Miller & Jentz, 2013).
An S-corporation is the fifth form of business and is formed by between 1 and 100 people who are referred to as shareholders. This form of business is regarded as a special type since it is formed through the Internal Revenue Service (IRS). It is considered a legal entity in which the shareholders are a separate entity from the business. It is appropriate for people who want to start a corporation that is not subject to double taxation. The main advantage of an S-corporation is the exemption from corporate tax rates that its shareholders enjoy (Johnson, 2008).
The sixth form of business, a franchise, refers to a type of business in which the owners allow third parties to use the rights to the company’s logo and acquire financial gain in return. A franchise is a common phenomenon in the field of business. It involves signing of a contract between the business owners and the franchisees, who are the buyers in this case. This form of business is suitable for people who intend to do business and earn from it without having to participate actively in its daily operations (Keup, 2009).
The last form of business, a corporation, is defined as a legal business that can operate purely on its own without the interference of its owners. A corporation can enter contracts and is liable for all the debts and taxes it incurs in the course of its operations. A corporation, unlike a sole proprietorship or partnership that can split up when an owner dies or quits, cannot be dissolved due to such reasons. For that reason, a corporation is suitable for people who intend to set up a business that has a real and independent legal entity that is separate from its shareholders (Johnson, 2008).
Cheeseman, H. R. (2010). Business law: Legal environment, online commerce, business ethics, and international issues (7th ed.). Upper Saddle River, NJ: Prentice Hall.
Johnson, L. M. (2008). Essentials of federal income taxation for individuals and business. Chicago, IL: CCH.
Keup, E. (2009). Franchise bible: How to buy a franchise of franchise your own business. New York, NY: Entrepreneur Press.
Miller, R. L., & Jentz, G. A. (2013). Fundamentals of business law: Summarized cases (9th ed.). Mason, OH: Cengage Learning.
Moore, C. W. (2008). Managing small business: An entrepreneurial emphasis (14th ed.). New Delhi: Cengage Learning.