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This article is excerpted from Business Structures, by Michael Spadaccini. The most common forms of business enterprises in use in the United States are the sole proprietorship, general partnership, limited liability company (LLC), and corporation. Each form has advantages and disadvantages in complexity, ease of setup, cost, liability protection, periodic reporting requirements, operating complexity, and taxation. Also, some business forms have subclasses, such as the C corporation, S corporation, and professional corporation. Choosing the right business form requires a delicate balancing of competing considerations. Learn how to select, plan, and organize the business form that is a perfect fit for you. The Sole Proprietorship The sole proprietorship is a popular business form due to its simplicity, ease of setup, and nominal cost. A sole proprietor need only register his or her name and secure local licenses, and the sole proprietorship is ready for business. A distinct disadvantage, however, is that the owner of a sole proprietorship remains personally liable for all the business's debts. So, if a sole proprietor business runs into financial trouble, creditors can bring lawsuits against the business owner. If such suits are successful, the owner will have to pay the business debts with his or her own money. The owner of a sole proprietorship typically signs contracts in his or her own name, because the sole proprietorship has no separate identity under the law. The sole proprietor owner will typically have customers write checks in the owner's name, even if the business uses a fictitious name. Sole proprietorships can bring lawsuits (and can be sued) using the name of the sole proprietor owner. Many businesses begin as sole proprietorships and graduate to more complex business forms as the business develops. Advantages of the Sole Proprietorship
Disadvantages of the Sole Proprietorship
The Partnership Partnerships can be formed with a handshake--and often they are. Responsible partners, however, will seek to have their partnership arrangement memorialized in a partnership agreement, preferably with the assistance of an attorney. Because partnerships can be formed so easily, partnerships are often formed accidentally through oral agreements. A partnership is formed whenever two or more persons engage jointly in business activity to pursue profit. Don't operate a partnership without a written partnership agreement. Because of its informality and ease of formation, the partnership is the most likely business form to result in disputes and lawsuits between owners--oral partnership arrangements are usually the reason. The cost to have an attorney draft a partnership agreement can vary between $500 and $2,000, depending on the complexity of the partnership arrangement and the experience and location of the attorney. Advantages of the Partnership
Disadvantages of the Partnership
In my law practice, I would almost never recommend a partnership to clients. The lack of liability protection is simply not an acceptable risk that I could ever recommend that a business owner undertake. The rare occasion where I recommended a partnership was when a corporation or LLC was legally unavailable to the owners, as is the case with law partnerships, for example. Another example would be when all the owners of the partnership were already liability-protected entities, such as when two LLCs come together as owners of a partnership. The Limited Liability Company (LLC)The Limited Liability Company (LLC) The LLC is often described as a hybrid business form. It combines the liability protection of a corporation with the tax treatment and ease of administration of a partnership. As the name suggests, it offers liability protection to its owners for company debts and liabilities. Simplicity and Flexibility The LLC changed all that. The LLC offers the liability protection benefits of the corporation without
the corporation's burdensome formalities. It is this simplicity that has made the LLC an instantly popular business form with businesspersons operating smaller companies. Potential Disadvantages of the LLC What should the owners of an LLC do if their company grows in size such that an LLC is no longer the appropriate business form? The answer is simple: it is possible to convert an LLC into a corporation. Thus, some small companies begin life as LLCs, outgrow the LLC form, and then the LLC's owners transfer the assets of the LLC to a newly
formed corporation with the same owners as the LLC. Thereby, the LLC is converted to a corporation. We have included some sample conversion forms in the appendix. Furthermore, as one might imagine, it is also possible to convert a corporation into an LLC, or nearly any business form into any other. It is also possible to reorganize a business in another state by transferring the assets of a business into a newly chartered entity. Converting business forms does require some sophisticated legal
and tax analysis and should not be attempted without the services of a qualified attorney and accountant. Advantages of the LLC
Disadvantages of the LLC
The Corporation A corporation has perpetual life. When shareholders pass on or leave a corporation, they can transfer their shares to others who can continue a corporation's business. A corporation is owned by its shareholders, managed by its board of directors, and in most cases operated by its officers. The shareholders elect the directors, who in turn appoint the corporate officers. In small corporations, the same person may serve multiple roles--shareholder, director, and officer. Corporations are ideal vehicles for raising investment capital. A corporation seeking to raise capital need only sell shares of its stock. The purchasing shareholders pay cash or property for their stock, and they then become part owners in the corporation. Of course, the sale of corporate stock is heavily regulated by the U.S. Securities and Exchange Commission and by state securities laws. A corporation's shareholders, directors, officers, and managers must observe particular formalities in a corporation's operation and administration. For example, decisions regarding a corporation's management must often be made by formal vote and must be recorded in the corporate minutes. Meetings of shareholders and directors must be properly noticed and must meet quorum requirements. Finally, corporations must meet annual reporting requirements in their state of incorporation and in states where they do significant business. Advantages of the Corporation
Disadvantages of the Corporation
Michael Spadaccini has 14 years of experience as a corporate attorney specializing in business, trademark,
securities and internet law. He has written several self-help legal guides, including Forming an LLC, Incorporate Your Business, The Operations Manual for Corporations
and Small Claims Court Guidebook, all available from Entrepreneur Press. What combines advantages of a corporation and a partnership?Limited liability company (LLC)
An LLC lets you take advantage of the benefits of both the corporation and partnership business structures.
Which of the following is an advantages of a partnership?Advantages of a partnership include that: two heads (or more) are better than one. your business is easy to establish and start-up costs are low. more capital is available for the business.
What are the advantages of a corporation over a sole proprietorship and partnership?There are several advantages to becoming a corporation, including the limited personal liability, easy transfer of ownership, business continuity, better access to capital and (depending on the corporation structure) occasional tax benefits.
Which of the following is an advantage of a limited partnership?One of the biggest advantages for a limited partner in the Limited Partnership is the fact that he or she only faces limited liability. If the business goes bankrupt or is sued, the limited partner is only liable up to his investment in the business and the business's assets.
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