Business Ownership
In order to have a successful business, you must understand the
rules or laws by which you must conduct your business. One of
the first steps you need to take is choosing the legal structure
for your business that will best suit your needs and the needs
of your business. Listed below are three principal kinds of
structures:
the proprietorship the partnership and the corporation. Each has
general advantages and disadvantages that must be weighted to
reflect your specific goals and needs.
SOLE PROPRIETORSHIP
Sole
Proprietorship
The sole proprietorship is usually defined as a business that
is owned and operated by one person. This is the most widespread
form of small business organization. In order to establish a sole
proprietorship, you only need to obtain whatever licenses you
need and begin operation.
ADVANTAGES OF SOLE PROPRIETORSHIP
Ease of Formation.
There is less formality and fewer
legal
restrictions associated with establishing a sole proprietorship.
It needs little or no governmental approval and is usually less
expensive than a partnership or corporation.
Sole ownership of profits.
The proprietor is not
required
to share profits with anyone.
Control and decision making vested in one owner.
There
are no co-owners or partners to consult.
Flexibility.
Management is able to respond quickly to
business
needs in the form of day to day management decisions as governed
by various laws and good sense.
Relative freedom from government control and special
taxation.
DISADVANTAGES OF THE SOLE PROPRIETOR
Unlimited liability.
The individual proprietor is
responsible
for the full amount of business debts which may exceed the
proprietor's
total investment. This liability extends to all the proprietor's
assets, such as house and car. Additional problems of liability,
such as physical loss or personal injury, may be lessened by
obtaining
proper insurance coverage.
Unstable Business Life.
The enterprise may be crippled
or terminated upon illness or death of the owner.
Less available capital, ordinarily, than in other types of
business organizations.
Relative difficulty in obtaining long-term
financing.
Relatively limited viewpoint and experience.
This is
more
often the case with now owner than with several.
NOTE: A small business owner might select the sole
proprietorship
to begin with and later, if the owner feels the need, change over
to a partnership or corporation.
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THE PARTNERSHIP
The
Partnership
A partnership is defined as an association of two or more
persons
to carry on as co-owners of a business for profit. Though not
specifically required, written Articles of Partnership are
customarily
executed. These articles outline the contribution by the partners
into the business (whether financial, material or managerial)
and generally delineate the roles of the partners in the business
relationship.
KINDS OF PARTNERS
Ostensible Partner.
Active and known as a partner.
Active Partner.
May or may not be ostensible as
well.
Secret Partner.
Active but not known or held out as a
partner.
Dormant Partner.
Inactive and not known or held out as
a partner.
Silent Partner.
Inactive (but may be known to be a
partner)
Nominal Partner.
Not a true partner in any sense, not
being a party to the partnership agreement. However, a nominal
partner holds him or herself out as a partner, or permits others
to make such representation by the use of his/her name or
otherwise.
Therefore, a nominal partner is liable as if he or she were a
partner to third persons who have given credit to the actual or
supposed truth of such representation.
Subpartner
. One who, not being a member of the
partnership,
contracts with one of the partners in reference to participation
in the interest of such partner in the firm's business and
profits.
Limited or Special Partner.
Assuming compliance with
the
statutory formalities, the limited partner risks only his or her
agreed investment in the business. As long as he or she does not
participate in the management and control of the enterprise or
in the conduct of its business, the limited partner is generally
not subject to the same liabilities as a general partner.
ADVANTAGES OF A PARTNERSHIP
Ease of formation.
Legal informalities and expenses are
few compared with the requirements for creation of a
corporation.
Direct rewards.
Partners are motivated to apply their
best abilities by direct sharing of the profits.
Growth and performance facilitated.
In a partnership,
it is often possible to obtain more capital and a better range
of skills than in a sole proprietorship.
Flexibility.
A partnership may be relatively more
flexible
in the decision making process than in a corporation. But, it
may be less so than in a sole proprietorship.
Relative freedom from government control and special
taxation.
DISADVANTAGES OF A PARTNERSHIP
Unlimited liability of at least one partner.
Insurance
considerations such as those mentioned in the proprietorship
section
apply here also.
Unstable life.
Elimination of any partner constitutes
automatic
dissolution of partnership. However, operation of the business
can continue based on the right of survivorship and possible
creation
of a new partnership. Partnership insurance might be
considered.
Relative difficulty in obtaining large sums of capital.
This is particularly true of long term financing when compared
to a corporation. However, by using individual partners' assets,
opportunities are probably greater than in a proprietorship.
Firm bound by the acts of just one partner as agent.
Difficulty of disposing of partnership interest.
The
buying
out of a partner may be difficult unless specifically arranged
for in the written agreement.
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THE CORPORATION
The
Corporation
The corporation is the most complex of the three business
structures.
Therefore, we will discuss only the general characteristics of
the corporation. As defined by chief Justice Marshall's famous
decision in 1819, a corporation is "an artificial being,
invisible, intangible, and existing only in contemplation of the
law."
Formation of the Corporation
A corporation is usually formed by the authority of a state
government.
Corporations which do business in more than one state must comply
with the Federal laws regarding interstate commerce and with the
state laws, which may vary considerably.
The procedure ordinarily required to forma corporation is that,
first, subscriptions for capital stock must be taken and a
tentative
organization created. Then, approval must be obtained from the
Secretary of State in the state in which the corporation is to
be formed. This approval is in the form of a charter of the
corporation
stating the powers and limitations of the particular
enterprise.
ADVANTAGES OF THE CORPORATION
Limitations of the stockholder's liability to a fixed amount
of investment.
However, do not confuse corporate liability
with appropriate liability insurance considerations.
Ownership is readily transferable.
Separate legal existence.
Stability and relative permanence of existence.
In the
case of illness, death, or other cause for loss of a principal
officer or owner, the corporation continues to exist and do
business.
Relative ease of securing capital in large amounts and from
many investors.
Capital may be acquired through the issuance
of various stocks and long term bonds. There is relative ease
in securing long term financing from lending institutions by taking
advantage of corporate assets and often personal assets of
stockholders
and principals of guarantors.
Delegated authroity.
Centralized control is secured
when
owners delegate authority to hired managers, although they are
often one and the same.
The ability of the corporation to draw on the expertise and
skills of more than one individual.
DISADVANTAGES OF THE CORPORATION
Activities limited by the charter and by various laws.
However, some states do allow very broad charters.
Manipulation.
Minority stockholders are sometimes
exploited.
Extensive government regulations and required local, state,
and federal reports.
Less incentive if manager does not share in profits.
Expense of forming a corporation.
Double tax - income tax on corporate net income and on
individual
salary and dividends.
USEFUL LINKS
Mycounsel.com Provides legal interpretations and the advantages and disadvantages of the different forms of business structure.
BusinessTown.com More specifics about business structure.
'Lectric Law Library Thorough discussion of the legal implications of each type of business structure. Includes a discussion of tax issues.
Information on this page was obtained from: STARTING UP YOUR OWN
BUSINESS. Produced by the U. S. Small Business Administration
and compiled by Dr. G. Howard Poteet.
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This Web page was originally created by Vicki Thompson and was last updated by Joseph Klein on 11/15/2000.