What Form will You Chose for Your Business?

Hello guys! When you start a business, the basic problem that you face is how to raise cash. The standard method to solve this problem is organizing your business as a corporation. Today we will discuss the three basic legal forms of organizing firms and also how firm raise large amount of money under each form.

The Sole proprietorship

A sole proprietorship is a business by one person. In this form, after you obtain the business license, you start hire as many people that you need and borrow money you need. At year-end all the profits and losses will be yours.

There are some important things related sole proprietorship:

1. The sole proprietorship is the cheapest business to form.
2. The sole proprietorship pays no corporate income taxes but taxed as individual income
3. No distinction is made between personal and business assets.
4. The life of the sole proprietorship is limited by the life of the sole proprietor.
5. The equity money that can be raised by the sole proprietor is limited to the proprietor’s personal wealth.

The Partnership

If you want to start business together with your friend or someone, you can form a partnership firm. Partnerships divided into two categories:

1. General partnerships

A general partnership happen, when:

1. All partners agree to provide some fraction of the work and cash and to share the profits and losses
2. Each partner is responsible for all of the debts of the partnership

2. Limited partnerships.

Limited partnerships permit some of partner are limited only be responsible to the amount of cash for the partnership. Limited partnerships usually require that at least one general partner and the limited partners do not participate in managing the business.

Here are some important things related a partnership:

1. Partnerships are usually inexpensive and easy to form.
2. The important tool in partnership is a partnership agreement that specifies the nature of the arrangement may be an oral or a formal document.
3. General partners have unlimited liability for all debts. The liability of limited partners is usually limited to the contribution each
4. The general partnership is terminated when a general partner dies or withdraws. However, limited partners may sell their interest in a business.
5. The equity money that can be raised by the sole proprietor is limited to a partner’s contribution to the partnership
6. Income from a partnership is taxed as personal income of the partners.
7. Management control resides with the general partners.

The Corporation

The last form and also the most important is corporation. When your business is in corporation form, your business has a distinct legal entity. Your corporation can have a name and enjoy many of the legal powers like citizen of state.

Here are some important things related a corporation:

1. Corporation is more complicated and also expensive to form. The incorporators must prepare articles of incorporation and a set of by lawyers
2. The corporation comprises three sets of distinct interests: the shareholders (the owners), the directors, and the corporation officers (the top management)
3. Because ownership in a corporation is represented by shares of stock, ownership can be readily transferred to new owners
4. The corporation has unlimited life. Because the corporation is separate from its owners, the death or withdrawal
5. The shareholders’ liability is limited to the amount invested in the ownership shares.
6. The corporation pays corporate income taxes

Based on the explanation, we can conclude that the main advantage to a sole proprietorship or partnership is the cost of getting started. In the other hand, the corporation makes your business ease to be sustain. So, what form will you chose for your business?

By: Dera Hafiyyan  as finance lover

Reference:

Ross, Stephen A., Randolph W. Westerfield and Jefrey Jaffe. 2010. Corporate finance. 9th ed. New York: McGraw-Hill.