How to choose the right type of Business form
Today’s business world has many choices for the new entrepreneur to decide from when forming a business. The choices are sole proprietorship, partnership, limited liability partnership, a limited liability company, a S corporation, a franchise, and a corporate form. Development of scenarios portraying each of these forms of business will aid the entrepreneur with deciding which form will be the best choice for the business. Sole Proprietorship
“Sole proprietorship is the simplest form of business organization. The owner of the business the sole proprietor is the business” (Cheeseman, 2010 p.530) advantages to this form of business is that it is easy to form and does not cost much in regard to monetary allocation. The owner makes all the decisions and owns all of the business and its profits. Samantha is a young woman who wants to own her own business. Sam’s Dragon Salts, a bath salt business. Sam operates the business out of her home, Sam is the owner of the business, and because she is the only owner the business is run as a sole proprietor that is, “:a business owned by only one person and operated for his or her profit” (Kauffman Foundation, 2007) . Sole proprietorship is the easiest to own and maintain requiring little to no paperwork or approvals to begin operation. Sam’s bath salt business has done well and orders are coming in faster then she can fill so Sam now has advanced her business to the point where she needs to take on a partner. Sam starts researching the different types of partnership forms available to assist her with taking her business to the next step.
“A partnership forms when two or more entities join together for a common business purpose. Two or more people, a person and a corporation, two corporations, or even two partnerships may form a partnership.” (Kaufman foundation, 2007 p.2). Sam is forming a partnership with her best friend Beth who, like Sam, is a sole proprietor of a homemade hand lotion business. After meeting and discussing things they both have decided to become partners in a business which they decide to name Dragon Scales Bath and Lotion. When deciding to form the partnership, Sam and Beth, had to decide the type of partnership that their new business would become. Partnerships can be either general or limited. General partnerships are defined as “a voluntary association of two or more persons for carrying on a business as co-owners for profit. General partners are personally liable for the debts and obligations of the partnership.” (Cheeseman, 2010 p.534) In the formation of a general partnership, four criteria must be met. The partnership has to be (1) formed with association of two or more persons (2) carrying on a business (3) as co owners (4) for profit (Cheeseman, 2010 p.534). A general partnership can be formed with little to no formality and must be a co-ownership. To prevent any problems from occurring in the partnership, it is important for Sam and Beth to have a partnership agreement. The partnership agreement may be written or oral and depending on what state Beth and Sam are living in, they may have to file a certificate of partnership with the government agency responsible for business formation rules and regulations. Sam and Beth realized as their partnership advanced that they needed to move the business from their homes to a building but did not have enough capital to attain a building. After much discussion and research they decided that they need to add investors in their business that converted their general partnership to a limited liability partnership.
Limited Liability partnership
Limited Liability partnership have two types of partners (1) general partners who invest capital, manage the business, and are personally liable for partnership debts and (2) limited partners who invest capital but do not...