4 Types of Business Entities: Pros & Cons - Essay Sample

Introduction

The four main types of business entities include sole proprietorship, partnership, corporation, and Limited Liability Company. Before choosing to settle on one of these options, it is essential to first understand the nature of the business, as well as the various advantages and disadvantages.

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Sole proprietorship refers to a business entity where an individual personally owns a business and is thus responsible for its debts. It is advantageous because of how simple it is to set up the business. Also, it only requires a nominal cost since the owner will only need to register the entity under their name and obtain a local license. The whole process is simple and direct. Unfortunately, there are disadvantages in the sense that, in case of financial setbacks, creditors will have a legal right to bring lawsuits against the owner rather than the business entity. Therefore, there is no difference between the owner and the business.

A partnership refers to a business form where two or more individuals agree on how to run their business. An advantage of this approach is that the heavy taxes imposed on some types of companies are avoided. The amount is taxed on the individual taxes of the owners. However, there is also a disadvantage in the sense that debts and other financial obligations may impact the personal assets of the partners. That is the reason why some entrepreneurs engage in a limited partnership that protects their assets.

A corporation is a different legal entity, unlike the other two options. Here, there is no link between the personal and business assets of an owner. The corporation is an independent entity that can enter contracts, buy and sell goods, and even sue or be sued. However, it has disadvantages in the sense that it is taxed independently. Also, setting it up is not a simple and straightforward process. Specific requirements must be met before an operating permit is awarded.

Lastly, a Limited Liability Company (LLC) it's a cross between a partnership and a corporation. This form of business organization combines the advantages of partnerships in the income department but has similar protection in limited liabilities like a corporation for all members. With an LLC, you can report your profits or losses on your personal taxes which can be an advantage. One of the biggest disadvantages is that you must be diligent in keeping your business and personal accounts very separate, so they stay protected. The limited liability won't help you if you mix them up, they would be able to go for your personal assets also.

Limited Liability Company (LLC) is the business entity that I would recommend Arcadia Sports to form. The most important reason for forming this business entity it's because it offers limited personal liability (MARTIN, 2019). An LLC is legally distinct from personal ownership. This is unlike a partnership or sole proprietorship where the firm and the owners are lawfully the same. Simply, business debts are also personal debts. Josh serves as an active outdoor enthusiast and deals with goods that are sporting related. Also, he is the main operator and face of the business. On the other hand, Jeb is a wealthy tycoon who gives the greatest contribution to the business in terms of financial resources. Besides, he is not capable of being involved in the daily activities of the business since he already owns a lucrative wind power firm. Hence, by making the business a limited liability company, Jeb's personal assets would have been protected after his business partner, Josh, was sued for negligence. Jeb would not have gone bankrupt or his wind farms closed by the government regulators. If the business were an LLC, Jane would have sued only the company but not the individuals themselves. Therefore, Jeb and Josh's personal assets would not have been seized. Another advantage of choosing LLC is management flexibility. Since Jeb had a wind power business to run, by making the business a limited liability company, he would have the freedom of running the store unlike other business entities.

According to the characteristics of every business entity, Josh and Jeb will only be liable personally for Jane damages under partnership entity since, under this type of business, all the partners are fully liable for any losses or damages (Meiners, Ringleb, & Edwards, 2008). Hence, through partnership, Josh and Jeb will be responsible for each other losses. On the other hand, a sole proprietorship is not important in this case since it deals with only one owner but in this situation, there are two owners. Furthermore, in terms of a corporation and Limited Liability Company, the two owners will not be liable for Jane damages since in both, they are separate legal entities. Thereby, the shareholders or partners cannot be sued directly; the company or corporation takes the blame.

Jeb's personal creditors have the capability of seizing profits or assets of Arcadia sports. If the firm was a Limited Liability Company, then it is the company that will be sued. Nonetheless, Jeb's assets or profits will be seized equivalent to the amount of capital that he capitalized on in the business. On the other hand, under a corporation, Josh and Jeb as the shareholders, they will not be accountable for any losses but the personal creditors will seize all the assets of Arcadia Sports. Finally, under a partnership, Jeb and Josh are like partners and in partnership, one partner is responsible for the other in terms of losses or damages when accused of negligence or personal debts. As a result, in this case, both partners' assets will be taken since Josh is also personally liable for Jeb's debts.

References

Bradley, C. (2019). Business Entities as Skeleton Keys. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3337211

Dynamic Business Law, Fourth Edition, Nancy K. Kubasek, M. Neil Browne, Lucien J. Dhooge, Daniel J. Herron, Linda L. Barkacs, 2015, Retrieved from https://newconnect.mheducation.com/flow/connect.html

BIBLIOGRAPHY MARTIN, A. R. (2019). LIMITED LIABILITY COMPANY AND PARTNERSHIP ANSWER BOOK. WOLTERS KLUWER LEGAL REG.

Meiners, R. E., Ringleb, A. H., & Edwards, F. L. (2008). The legal environment of business. Mason, OH: South-Western Cengage Learning.