Legal Forms for Business

Legal Forms of Business

One of the most difficult decisions in business occurs before the business is even operating. That decision is to decide what legal form the business should be. Seven forms of business organization exist and each form has its advantages and disadvantages. The seven forms, sole proprietorship, partnership, limited liability partnership, limited liability company, S corporation, franchise, and corporate form, are demonstrated with a scenario and explained in this paper.

Sole Proprietorship

Sole proprietorship is simply sole ownership of a business. The owner, or the sole proprietor, has unlimited personal liability in which creditors may recuperate claims from the owner’s personal assets. According to Cheeseman (2010), sole proprietorship is the most common form of business. A common scenario for sole proprietorship is the “mom and pop” business. Brenda has opened up a hair salon in the apartment over her garage adjacent to her home. She gutted and remodeled the entire apartment into a salon. Brenda has the correct permits, licenses, and certifications for the business required by her city and state to run a business. Brenda is solely responsible and accountable for her business. The justification for sole proprietorship as the business form in this scenario is Brenda’s business is very simple, she is the only owner (and only employee), and she commingles her items and money with her business’s items and money.

Partnership

A partnership is similar to the sole proprietorship but has more than one business owners. The partnership is liable for debts and can own property. One of the biggest disadvantages is one partner is held liable for the other partner or partners.

“A business must meet four criteria to qualify as a partnership under the UPA [UPA

Section 6(1)]. It must be (1) an association of two or more persons (2) carrying on a business (3) as co-owners (4) for profit. A partnership is a voluntary association of two or more...