Different business organizations have different characteristics depending on their size, mode of formation, internal structure, and legal liability. This paper will discuss the characteristics, advantages, and disadvantages as well as in-depth legal liability in the various forms of business organizations.
Sole Proprietorship
This is the simplest form of business organization that is virtually owned and managed by one person, who controls 100% of the total assets of the business. Generally, day to day operations of the business is the responsibility of the owner.
Various advantages are associated with this form of business organization the most obvious being the ease of formation putting in mind that one does not have to go through the tedious bureaucracy of registration and incorporation before starting to trade. In addition, the less requirement of registration makes it less costly and easy to organize as there are fewer or no defined functional positions in the business. Since the proprietor has full control of the business, decision-making becomes a very simple task as there will be no possibility of holding meetings or consultations. All the profits generated by the business are being taken by the proprietor who has the leeway to decide on whether to reinvest them or divert them to other personal use. The business is not recognized by law as a separate taxpayer and therefore all the income goes directly to the proprietor’s personal tax returns.
Despite these advantages, there are disadvantages inherent in the business, the major one being the burden of liability whereby the proprietor is legally liable for all debts incurred by the business. Due to limited endowment, the business always has challenges raising additional capital as it lacks collateral to secure bank loans. The simplistic nature and limited growth prospects as well as the ease of collapse limit the business’s chances of attracting talented and competent employees.
In its operation, the business is faced with various risks which have legal implications to the owner. Adequate insurance is important to shield the proprietor from personal liability in case of a lawsuit. In the case study, if an injury occurs from the errors of the outside installer, the proprietor will be liable as the insurance will not cover damages caused by an outsider to the business (unless there is an express contract drawn with specifications of liability to the contracted person). Concerning the accidents involving delivery trucks, the proprietor will be liable unless there is an insurance covering third parties and a comprehensive insurance covering the trucks. However, in case the cause of the accident was negligence of the drivers, then the proprietor’s personal assets on top of the business assets will be at risk of being taken up to cover damages in an event of lawsuit. The proprietor may insure the employees directly employed by him for accidents occurring while working. Therefore when a shop worker gets injured by a saw or sharper while doing the job, the proprietor will only be personally liable if the cost of insurance is not sufficient to cover the damages.
Where the bills and other liabilities accrue and the business has failed, the proprietor’s personal assets will be used to cover such bills and liabilities since he is not recognized as a separate entity from the business. Regarding the insurance, all the assets and employees’ insurance covers will be registered under the proprietor’s name and in the event the claims exceed the sum insured personal assets will have to be attached. Expanding the business both by geographical market and opening a new factory in the adjacent state will be a challenge since he will have to dip into his savings or borrow a consumer loan which may be insufficient. Since the firm may not have sufficient assets to act as collateral for a large bank loan, engaging a partner will be a better option to raise additional capital.
General Partnerships
A general partnership is a form of business organization that is formed by at least two people who carry out certain business operations for a common course. Generally, the partners in this form of business organization are not recognized as separate entities from the business and they are joint and severally liable for the debts and other obligations incurred by the business. Moreover, just like in sole proprietorship, the life of general partnership is volatile such that, in case of death, insolvency or incapacitation of one partner, the partnership is dissolved, unless the partners have agreed otherwise in their partnership deed. Although the general partnership may carry business anywhere within the state, it has to have a registered office where the files of the partners are kept (DFIC, N.d).
Advantages of partnership include simplicity of formation and less cost of formation; taxation is on individual income tax returns; partners share losses that may arise from the business; and partners can combine assets to build a large capital base for the business. In addition, there is flexibility in terms of agreement for responsibilities and benefits for each partner in the business.
Partnerships can also be risky in that the partners are jointly and severally liable for the debts and other liabilities of the business (Moye, 2004, p. 44). The acts of one partner legally bind all the partners and all the profits from the business are shared by all the partners equally or as per agreed ratios. There is a high likelihood of occurrence of disputes in decision-making as partners may have conflicting opinions and ideas.
In the case study, the partners will still be liable for injuries caused by errors of an outsider installer, although partnerships may have sufficient funds to employ enough staff to carry out duties (or partners can share the responsibilities). Damages from truck accidents may be covered by insurance; otherwise the partners will be personally liable. However, unlike in sole proprietorship, the burden to individual partners may be low since all the partners are jointly and severally liable. The injury to the shop worker may legally bind the partners to the amount exceeding insurance cover, but unlike sole proprietors, the partners will share the burden equally. The same applies to the injury caused by a load falling from a forklift. In the case of bills and other liabilities, if the business was a partnership, the partners would have been jointly and severally liable to put in personal contributions on top of the assets of the business. In cases where the insurance claims exceed the amount of cover, partners can share the excess burden thus experiencing a lesser impact on personal property than the sole proprietor. Business expansion is much easier for partnerships as the partners can combine efforts to raise capital or sell part of shares to an outsider. However, large corporate borrowings may be a challenge due to capital endowment.
Limited Partnerships
These are similar to general partnerships except that the liability of the partners is tied to the proportion of contribution of each partner to the business. In Addition, just like limited liability companies, limited partnerships are required to have a registered office where their administration work is conducted and this office must be specifically located as indicated in the certificate of partnership and compliance with Partnerships Act. Moreover, all the profits of the limited partnership are retained by the partners in proportion to their contribution to the business. Advantages of this form of the organization include limitation of partner’s liability to the portion of contribution to the business, income flows directly to the partner’s income tax returns for taxation purposes, a limited partner may not have to be directly involved in daily operations but only provide finance and may have some element of going concerned where a partner may be replaced without dissolving the partnership (Moyes, 2004, p. 90). In addition, the acts of negligence by one partner do not affect the personal assets and contribution of the other partners.
One disadvantage of the limited partnerships is the requirement of more formality in formation and than general partnership and filing of the partnership certificate. In addition, there must be at least one general partner who is personally liable as in the caser of general partnership. Decision-making is a complex process due to the divergence of opinions.
In the case study, the injury caused by an outsider contractor is unlikely as the limited partnership has enough resources to employ adequate staff. However, delivery truck accidents will bind the partners to the extent of their contribution except for the general partner whose personal assets have to be attached. Employees in the usually insured and therefore the injury to the shop worker will be covered by insurance company unless there is proof of negligence where the partners will lose only their contribution except the general partner. Excess insurance claims may also not affect the personal assets of the limited partners who will only have financial risk and no liability risk. Expansion of business is easier as limited partnerships are to some extent recognized by law and can have substantial collaterals to secure big bank loans.
C-Limited corporations
This is a form of organization that is incorporated and limited by shares. It is regarded as separate entity from the owners and tax is applied to it separately (Plotkin, wells and Wimmer, 2003, p. 13). Generally, c-corporations are regarded as going concerns in that unless dissolved by act of law, their life is perpetual and can not be influenced by any of the owners. The control of c-corporations’ operations is with the directors appointed by the shareholders during an annual general meeting, who in turn recruit management team to carry out the executive duties – shareholders/owners have no direct control of the business. Another characteristic of C-corporations is that, before being given a certificate of incorporation they must present a memorandum of association containing, among others, a clause specifying the registered place of office of the corporation. In addition, profits are the corporation may declare distribution of profits in form of dividends although not all of the profits are paid as dividend since part is retained for business expansion or other obligations. One significant advantage of this organization is that all the shareholders of the corporation are entirely not liable for any debts or other liabilities by the company and are not directly involved in the day-to-day operations – they appoint directors to do so. In addition raising capital is very easy as the corporations have substantial assets to secure large loans.
The disadvantage of this business organization includes double taxation where the organization is taxed at corporate rate and the shareholders taxed on the dividends received from the company. In addition, there is a long formality before the registration and commencement of operations are approved.
In the case study, there is less likelihood of the corporation engaging an outsider in its business since it has enough resources to employ all the staff it needs. In addition, the involvement of trucks in an accident will be covered by insurance unless otherwise whereby only the business will be liable and not the shareholders. Corporations operate under company law which provides for insurance cover of employees against workplace injuries; also there are other employee regulations that the corporation has to comply with and in case of insurance is unable to cover the claims, only the corporation itself will be liable. In addition, corporations can sell shares publicly to raise enough capital to expand the business and even set up additional factories.
S-Corporations
These are almost similar to C-corporation except that there is no element of double taxation, since corporation tax does not apply. In addition, only one class of shares is permitted and each shareholder has one voting right regardless of the number of shares held (Plotkin, wells and Wimmer, 2003, p. 27). Other than taxation, the other advantage is limitation of liability whereby individual shareholders are not personally liable for business debts. All the profits in the s-corporation are distributed to the shareholders who must include them in their taxable income for taxation purposes. In addition, just like C-corporations, they have perpetual life such that demise, bankruptcy or incapacitation of an individual shareholder can not affect the continuity of the corporation. The shareholders have no direct control of the corporation but a board of Directors is mandated with responsibility of controlling operations of the corporation. Before registration, the S-corporations must file a memorandum indicating the location of the registered office and any subsequent change of location should also be approved by registration authorities. The disadvantage with this form of business organization is the limitation of membership number and eligibility (less than 100 members and us citizens or residents only).
In the case study, just like in C-corporation, staffing is not a problem and therefore there is no likelihood of injuries from an external temporary employee. Delivery truck accidents will not bind the shareholders but the business in case insurance cover is insufficient to cover claims or the driver is negligent. Employees are covered by insurance for injuries sustained while working, according to regulations by authorizing parties and capital. In addition, all bills and other liabilities will be settled from the assets of the corporation and not members’ personal property. Moreover, S-corporation can raise huge capital through sale of shares or bank loans thus making expansion easier than partnerships or sole proprietorships.
Limited Liability Company
This is a form of the business organization formed by at least two people with limited liability. Generally, the owners of this organization are referred to as members but not shareholders and they are recognized as separate legal entities from the company. One advantage of LLC is that members have limited liability for all debts of the company and that they enjoy pass-through taxation whereby income from the business passes through to their personal income tax returns thus avoiding double taxation. This means that all the profits of the company are retained by the members. In addition, the continuity of life of the LLC is not direct unless the members vote to have the LLC continue to operate especially when the LLC is formed to pursue a particular objective for a definite time period. The location of the registered office including both physical and mailing addresses must be disclosed during the registration process. moreover, the LCC may decide to be managed by the members or may recruit managers who are not members to control the operations of the company. The disadvantage with LCC is that it requires formal registration making it more expensive than partnerships or sole proprietorships. In addition, membership of the company is not readily transferable like it is in corporations.
In the case study, members are protected from liability caused by an outsider, although the firm may have enough funds to employ enough employees. Liabilities following from truck accident will be born by the assets of the company and not the members’ personal property and injuries to the shop worker will not bind the members even if the company is unable to pay damages. Bills and other liabilities will not affect the member’s personal property since they are recognized by law as separate entities. Due to the non-transferability of shares, raising capital through the sale of shares may be difficult but the company may have adequate assets to act as security for bank loans thus helping in the expansion of business.
References
DIFC. General Partnership Regulations. Web.
Moye, J. (2004). The Law of Business Organizations. KY: Cengage Learning.
Plotkin, M. E., Wells, B. and Wimmer, K. A. (2003). E-commerce law and business. Aspen Publishers. Web.