The legal system of each country defines different forms of business entities. On a large scale, the common forms of business entities include sole proprietorship, partnership, limited liability partnership, limited liability companies, S corporations, franchise and corporate forms. These forms of business entities vary in the manner of ownership and their capital base sizes. Furthermore, the conditions and requirements for their formation vary, with sole proprietorship being the simplest. The categorization of business entities in this manner guides both the owners and the government in understanding each entity’s legal obligations such as taxes. Essentially, the influencing factor for any choice of business entity is the amount of capital and line of business the entity wishes to engage in (Pride, 1999).
Sole proprietorship entails an unincorporated business owned by an individual. This formation requires a small initial capital and less legal requirements., This form of business entity is the most preferable in cases, where absolute management and supervision is required. Since this formation is simple and cheap, sole proprietorship is significantly convenient for an individual who desires flexibility and maximum management of his or her business. Additionally, the small size of the initial capital attracts individuals into this venture.
Partnership is a business entity formed by a group of individuals ranging from two to twenty. However, the maximum limit may be exceeded in the case of certain professionals such as lawyers and doctors. Under this entity, the sharing of all the profits and losses is proportionate according to the capital contribution or any agreements made prior to this formation. Partners have unlimited liability for the business. Thus, in the event of liquidation or bankruptcy, their assets will be disposed to cover for liabilities. For partners with a small amount of capital, the consolidation of their funds would be significant if they wish to foster to great heights of business.
Limited liability partnership is a business entity that must have at least one general partner. It also comprises of limited partners. The general partner assumes unlimited liability for the business. This implies that the general partner is involved in the active management and assumes liability for the business. On the other hand, limited partners only contribute their capital, which covers for the risks of the business. In case the business is unable to meet its liabilities, the general partner’s assets will be included if the business assets are inadequate (Emerson, 1994). This form of business is convenient for individuals with the need to avoid business risks with individual property. Additionally, the full control over the performance and management of the business motivates the general manager.
A limited liability company refers to a separate legal entity in which its shareholders have limited liability. In case of the entity’s failure, shareholders are bound to lose their investments. In this regard, none of the shareholders will be liable for debts to the corporations’ creditors. Since it is a separate entity, the investors who do not wish to participate in management will find this form of entity attractive with minimal risks and government interference.
Corporations refer to legal entities established under the corporation act. They are separate entities that provide legal and financial protection to their shareholders. This implies that shareholders have limited liability protection. Additionally, corporations have full influence over the distributed or retained returns. As a result, corporations can operate despite multiple losses for a number of years. This form of venture is suitable for individuals interested in obtaining long-run returns.
A S corporation is a legal entity with similar features to a partnership. Its membership consists of one to a hundred shareholders. In case when a shareholder contributes actively in the daily management of the business, he or she is remunerated. Furthermore, the salary payment is separate from the sharing of profits and losses. Thus, individuals interested in engaging in business activities or being dormant will consider this form of venture appropriate.
A franchise entails legal entity with exclusive business rights and privileges to engage in a certain business. Through the acquisition of trademarks, patents or copyrights, franchises have rights to participate solely in its initiated business (Velasquez, 2006). This form of venture will be appropriate for businesspersons with unique business ideas.