One of the most common ways in which business managers are involved with business law is in relation to contracts. Organizations of any size will most likely need to create, negotiate, review, approve, adhere to, and resolve conflicts associated with contracts. A business determines its legal standing by determining what type of legal entity it should be. The type of legal entity can significantly impact:
· How lawsuits can be brought.
· How the organization enters into contracts.
· How the income from the organization’s contracts is taxed.
· How liability for breach of contract is assigned.
· How the business is sold.
For this assignment, assume that you work as a manager in a relatively small, privately owned U.S. business. The company president (who is also the owner) inherited the company from his mother and has never started a business. He is considering creating a spin-off business (possibly with one or two associates) but is unsure about what form of business entity would be best to use for the new business. It is expected that contracts will play a major role in the success of the business, as it utilizes numerous suppliers and distributors. The president knows you took a university-level business law class and has asked you to write a briefing analyzing the four most common business entities in the context of contracts to help him decide which type of organization to choose for the new operation.
Research each of the following forms of business entities:
· Sole proprietorship.
· General partnership.
· Corporation.
· Limited liability company (LLC).
· How is ownership of the business transferred in terms of what is sold?
· Explain the advantages and disadvantages inherent in each of the four business forms with regard to selling the business.
Full Answer Section
General Partnership
Ownership Transfer: In a general partnership, the ownership of the business is transferred when a partner sells their partnership interest. This can be done through a sale to another partner, a sale to a third party, or a retirement.
Advantages:
- Easy to set up and maintain
- No corporate taxes to pay
- The partners have complete control over the business
Disadvantages:
- All partners are personally liable for all debts and liabilities of the business
- Partners may have difficulty resolving disagreements
- The value of the business is tied to the net worth of the partners
Corporation
Ownership Transfer: In a corporation, the ownership of the business is transferred through the sale of shares of stock. Shares of stock can be sold to individuals, other businesses, or institutional investors.
Advantages:
- Limited liability for shareholders
- Ability to raise capital by selling shares of stock
- Perpetual existence
Disadvantages:
- More complex to set up and maintain than other business entities
- Subject to corporate taxes
- Shareholders may have limited control over the business
Limited Liability Company (LLC)
Ownership Transfer: In an LLC, the ownership of the business is transferred when a member sells their membership interest. This can be done through a sale to another member, a sale to a third party, or a retirement.
Advantages:
- Limited liability for members
- Ability to raise capital by selling membership interests
- Flexible management structure
Disadvantages:
- May be more complex to set up and maintain than a sole proprietorship or general partnership
- Subject to self-employment taxes
- The value of the business is tied to the net worth of the members
Which Business Entity is Best for a New Business with Numerous Contracts?
When choosing a business entity, it is important to consider a number of factors, including the following:
- Personal liability: How much personal liability is the owner willing to assume?
- Taxation: How will the business be taxed?
- Control: How much control does the owner want to have over the business?
- Raising capital: How will the business raise capital?
- Flexibility: How flexible does the business need to be?
For a new business with numerous contracts, an LLC may be the best choice. LLCs offer limited liability for their members, which means that the members are not personally liable for the debts and liabilities of the business. LLCs are also relatively easy to set up and maintain, and they offer a flexible management structure.
However, it is important to note that LLCs may be subject to self-employment taxes. This means that the members of the LLC will be required to pay taxes on their share of the LLC's profits, even if those profits are not distributed to them.
Ultimately, the best way to decide which business entity is right for a new business is to consult with an attorney or accountant. They can help the business owner to assess their individual needs and choose the business entity that is best suited for those needs.