According to Mansueto (2007), when commencing any business, one should clearly understand the right legal form that the business should take since this has great impact on the future growth of the business. He notes that because people involved in business may desire to change business from one form to another, there is a need for good knowledge of the different forms of business available and the kind of scenarios which suits each form.
According to Ward (2008), a sole proprietorship form of business is legally inseparable from the owner. She notes that it is mostly suitable where flexibility is required. This is because it allows the owners to shift to other products or services at their own will as long as they see a more profitable business opportunity. She argues that some individuals have also resorted to this form of business since it is the cheapest in terms of the amount of capital required for its opening and also the easiest to begin and operate in terms of legal requirement. That is, one only needs a business license to start operating it.
Moreover, this form of business is also appropriate in cases where a proprietor wants to have full control and authority over the assets, management, and the type of goods to be sold as well as the services to be offered. It also suits individuals with full experience in the line of business they want to commence. According to Perez, another favorable scenario is where a person would like to enjoy tax simplicity as experienced by such a simple form of business. For example, it is appropriate for a business that involves the sale and repair of radios.
On the other hand, Perez points out that partnership form of business is majorly found in the scenarios where such professionals like dentists, doctors, accountants, and lawyers share common knowledge, skills, and expertise and pull together their management and operational skills to begin a business. She argues that the partners in this form of business are attracted together by the need to share their experiences and workload as well as so as to pool their capital together. According to her, other people also join partnership because of the unlimited liability in case the business realizes a loss. Additionally, Ward (2008) notes that there are those who would want to enjoy the corporate decision making, which increases their probability of succeeding. Moreover, some people have the required capital but lack either business idea or skill, and thus, they venture into partnership to take advantage of those who have these skills.
Regarding limited liability partnership, it is a form of business where partners are protected against personal liability. It is mostly suitable where the partners want to evade paying the depth of the business. The partners also take advantage of the fact that they contribute only a part of the shares; therefore, in case of any failure of the company, they only lose the lump sum they invested.
According to Mansueto (2007), corporate form of business is an incorporated form of business that provides both legal and financial protection to its shareholders. The liability of the shareholders is usually limited to their share of capital contributions. The corporate form of business normally achieves credibility and, thus, attracts investors who may wish to either lend money or even become shareholders. Therefore, for quick expansion purposes, small businesses choose to go corporate to enable them to easily sell their stock and get the amount of capital required.
According to Woods (2008), franchise involves a case where an agreement is made by a franchiser and an owner of trademark on usage of trade copyright, name, trademark or agreement to sell any of the products. It is preferably done when a person buying the rights wants to gain acceptance of his/her particular product or service in the market. This is because a buyer in this case has known the franchiser for a long period and has developed trust in his/her products as well as became loyal to his/her brand.
According to Woods (2008), S-corporation is a corporation which has acquired a special tax status with the relevant authorities. It is usually formed by those who want to escape the double taxation since there is no payment of corporate tax on the profit of the business. Small businesses, therefore, prefer this kind of corporation since taxation is based on owners’ personal incomes.
According to McGraw (2008), a limited liability company is valuable for professionals because it protects the assets of each member from poor management and embezzlement of funds by other members. This form of business is preferred when members want to enjoy the ease in raising capital since its shares can be sold to whoever is eligible for this. Equally, a limited liability company is also important in a scenario where the already existing partnerships or S-corporations are just shifting into limited liability company since there will be no profit or loss incurred during such a transfer.
In conclusion, it is fundamental for any person involved in any business to understand all the legal forms of business and the circumstances under which they best operate. Lack of the legal knowledge has led to the closure of many businesses, which would have been very successful. There are also many people who have ventured into wrong forms of business, which killed their dreams never again to become the entrepreneurs they ever intended. Therefore, one should always consider different factors like an amount of capital, technical knowledge, legal requirements, competition level, as well as labor requirements before choosing to invest in any form of business.