The Advantages and Disadvantages of Various Business Entities, Essay Example
In the world of business, a company needs every advantage in the playing field as it can possibly get. So many business owners must weight the advantages and disadvantages of each legal business structure. This business structure is usually one of the first things decided when a new business owner starts to write a business plan. There are eight different kinds of business forms: Sole proprietorship, partnership, limited liability partnership, limited liability company, S corporation, franchise, and Corporation. Each business form as its own unique characteristics and advantages/disadvantages. It is important for business owners to be aware of each business form so they can decide which form best benefits their company.
The first kind of business structure is called a sole proprietorship. A sole proprietorship is the simplest business structure, where a business is owned and operated by a single persons Some business owners operate under their own name, and others choose a fictitious business name. The biggest advantage to a sole proprietorship is that the business has cheaper administration costs. It also has low start-up costs and the greatest freedom from regulation. The owner also keeps all profits fro the company. The disadvantages of a sole proprietorship is that the owner has full liability, and total responsibility for raising the capital to start the business. This is a good structure if a person is a freelancer or an independent contractor because they have the most freedom.
The next form of business structure is called a partnership. A partnership is when two or more people share ownership of a company. The advantages of a partnership is the ease of formation, a broader management base, a tax advantage, and low start-up costs. The disadvantages to a partners are divided authority, difficulty in finding partners that can be trusted and competent, lack of continuity and unlimited liability.Another form of business structure which a type of partnership is called a limited liability partnership. A LLP restricts liability to only a partners negligent actions or people he/she is directly responsible for. The disadvantages are that both partners can overextend the firm by committing it to business agreements. A partnership is very beneficial to lawyers and accountants because two partners can share some of the business responsibilities without having to be legally obligated to each other.
A very common business structure is a limited liability company, or LLC.
a LLC blends the elements of a partnership and corporate structures. It provides limited liability to its owners. The advantages of a LLC is that the owners are not liable for negligible actions, and the taxations process can be very beneficial because a LLC prevents double taxation. There is also less regulations than a corporate structure. The disadvantages of a LLC is that there can not be any stock options as it is treated as a partnership. Earnings are also subject to a self-employment tax, and there is a general lack of uniformity throughout the company. A LLC is very attractive to many startups because it tis easy to form and has many tax advantages.
A structure that is often used for large entities is the corporation. The largest advantage of a corporation is the ability to issue stock, the ability to raise money, the protection of personal assets, the ease of transfer of ownership, and the credibility that comes along with the corporate tag. The disadvantages to a corporation is that it takes a good amount of time and money to form, and they are held to strict standards, and there could be more taxes. Another type of corporation is called the S corporation, where there are some loopholes available so a company can avoid taxes.
The last business structure is called a franchise. The advantages to a franchise is a smaller than usual investment, more product accepting by the product, management assistance and better profit margins. The disadvantages to a franchise is high franchisor fees, loss of independence, an difficulties in canceling contracts. A scenario where a company would become a franchise is when they want to streamline their business such as opening up a Burgerking.
At the end of the day, every business structure has its own unique advantages and disadvantages. It is up to the discretion of the business owners to decide which business structure will provide them with the most convenient and profitable structure.
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