LIT1 Task 1

Topics: Corporation, Types of business entity, Corporate tax Pages: 11 (2829 words) Published: April 22, 2015


Legal Issues for Business Organizations – LIT1
Task 1

Legal Issues for Business Organizations – LIT1
Task 1 – Part A

The way a business is organized is an important part of the business’s structure. “Different organizations provide different advantages and disadvantages in creation cost and simplicity, ongoing maintenance requirements, dissolution and continuity, fundraising, managerial control, public ownership, tax planning, and limited liability.” The nature of the business being conducted has little to do with the way the business is organized. (Johnson, 2013) Sole Proprietorship: The basic concept of sole proprietorship is that there is no distinction between the individual business owner and the business. To start this type of business, in most cases, one only needs to begin charging money for goods or services. Because of its simplicity, sole proprietorship is the most common business structure in the United States. According to the U.S. Small Business Administration, “over 70 percent of businesses are owned and operated by sole proprietors.” (Beesley, 2013) Following are some of the characteristics that lend both advantages and disadvantages to this type of business organization. Liability. As sole owner of a business, there is no severability of liability between the business and the individual. Therefore, all gains and losses of the business are also the gains and losses of the individual. The aspect of unlimited liability is one of the biggest disadvantages of this type of organization. Because there is no legal distinction between the business and the individual, if the business does not have the ability to fulfill its contractual financial obligations, the owner can be sued for their personal assets. The owner may also be held liable for the actions of any employee’s. Income Taxes. All income derived from the business is personal income for the individual business owner. This can make it challenging to plan for tax savings, as generally personal income tax is taxed at a higher rate. (Johnson, 2013) However, since the business is not taxed separately, it makes tax preparation easier. Longevity or Continuity of the Organization. Since the very nature of the sole proprietorship is in-severable, the business is only in existence as long as the owner is alive and/or wants it to be. In addition, ownership of the business cannot be passed from one individual to another and other individuals cannot join the business as owners. This is a disadvantage in that it influences the longevity of the business. Control. The business owner has complete autonomy to make all decisions regarding the business and can retain or relinquish as much control as desired. Complete control can be both an advantage and disadvantage. At times, it is an advantage to be able to make all of the decisions regarding the business. At other times, it is a disadvantage to not be able to share that burden. Profit Retention. All profits go directly to the owner of the business. However, in a sole proprietorship, profits are generally reinvested in the business. Location or Expansion. The business can easily be moved or expanded with sole proprietorship. One consideration on location would be state and local taxes. Since all income is personal, examining tax rates of the owner’s state of residence may be a factor in determining location. Convenience or Burden. In general, a sole proprietorship is the easiest and least expensive kind of business to start. However, certain licenses and permits may be required.

General Partnership: The basic concept of a general partnership is when two or more individuals each contribute money and skills to a single company. The partner’s divide the profits of the business equally. Each partner has full authority to act on behalf of the business and shares equal liability. Following are some of the characteristics that lend both advantages and...

References: Beesley, C. (2013, February 27). Blogs - Starting a Business. Retrieved from The U.S. Small Business Administration: http://www.sba.gov/blogs/sole-proprietorship-popular-business-structure-right-you
Choose Your Business Structure
Johnson, T. L. (2013). The Legal and Ethical Environment of Business, v. 1.0. Flat World Knowledge.
October 28, 2014
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