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Introduction
The company in question is involved in manufacturing where it produces a variety of wood products. It has been a sole proprietorship form of a business unit and currently. However, the owner has plans of converting the company to another form of business unit by considering various factors. However, the entrepreneur does not comprehend all forms of business units and thus he needs to make an informed decision before choosing the form of business that suits his situation.
Discussion of Various Forms of Business Units
Sole proprietorship
Sole proprietorship is the simplest form of business organization as it is formed and managed by a single individual. With this form of business, the organization is not registered on its own, hence cannot be separated from the owner (Lau & Johnson, 2011).
Moreover, the owner is entitled to all profits generated by the business at the end of a financial year as well as losses in case they arise. However, the owner is responsible over all debts and liabilities entered into by the business. In the formation of a sole proprietorship, the status automatically passes to the owner.
However, for the business to be legal, the owner has to register and obtain the necessary licenses and permits. However, rules regulating the registration process differ in accordance to the location of the business and the industry. In terms of taxation, the owner has to withhold taxes and submit them to the relevant authority. Moreover, the business cannot be taxed separately since incomes generated are also the owner’s incomes.
Advantages
Sole proprietorship is cheap and easy to form for structural costs are quite low as compared to other forms of business units. In addition, legal costs in relation to obtaining necessary documentation, licenses, and permits are always at minimum.
In addition, it is easy to prepare and file tax returns for the business is not taxed separately from the owner, which makes it easy to fulfill reporting requirement in relation to taxes. Decision making process is simplified and faster since the owner is the sole decision maker. Sale and transfer of properties takes place at the discretion of the owner, hence maintenance of secrets within the organization (Lau & Johnson, 2011, p. 236).
Disadvantages
In case the business falls into liability and is unable to pay, the owner is held liable for the debts and obligations of the organization. In addition, any liable act committed by the employees of the business is charged against the owner. In addition, the owner may not have expertise in all areas of management; therefore, he or she may find it difficult to run the entire business. Where there are no finances to start up the business, it is hard to raise capital, especially through seeking financial assistance from banking institutions.
General partnership
A partnership defines the relationship that exists between two or more people who have an aim of getting involved in business practices. In the course of carrying on a business, all parties involved share profits and losses as agreed. In the case of a general partnership, each of the partners contributes capital, skills, and even labor in return to sharing into the profits and losses of the business.
Although, there is no regulation requiring a partnership to be registered officially, it is always recommended for people to do so (Lau & Johnson, 2011, p. 240). In a court of law, evidence of two or more people carrying on a business is enough to call it a general partnership. It is also acceptable that a sole proprietor can change his or her business to this form.
In the case study, the sole proprietor is thinking of changing the form of his business to something else. However, if he settles for this form of business, he must be willing to have an additional partner into his business. Termination depends on the type of that the business partners were in; however, it can also end due to factors stipulated in the agreement.
Advantages
Raising capital is quite easier than when compared to a sole proprietorship for each partner contributes a certain portion of the capital. As opposed to a sole proprietorship, a general partnership can also access loans from financial and non-financial institutions. In the presence of an agreement, it would be easier to solve any problem that arises among partners. Division of labor can easily be exercised, as each partner will participate in running the business.
Disadvantages
In a general partnership, every partner is liable to all debts and liabilities of the organization. Unfortunately, all profits generated by the business are shared among partners. In addition, due to agency relationship that exists among partners, a mistake made by one person affects all other partners in the business.
Death of a single partner means an end to that partnership. Partners are also not free to transfer the ownership of their share to another person freely. Secrecy is not guaranteed in this form of business since every partner is authorized to transact on behalf of all others and all have equal access to books of accounts (p 245).
Limited partnership
As opposed to a general partnership, limited partnership must involve proper documentation. Partners willing to venture into such a business must also be willing to have a specific location. The partnership consists of limited and a general partner. The limited partner enjoys limited liability, whereas general partners are held liable to the extent of their personal liability. Creation of a limited partnership begins by filing limited partnership certificates through the relevant agency.
Advantages
Not all partners are liable to the debts and liabilities of the company. Limited partners are not liable to the debts of the partnership. In case of general partners, they are only liable to the extent of their contribution and not the entire liability. Raising capital for the partnership is quite easy.
Disadvantages
Any legal liability attached to the partnership can be passed to the general partner if the business is unable to meet its obligations. On the other hand, limited partners are passive investors, as they are not allowed to assume active participation in the management of the business. The process of setting up may be long and cumbersome due to the registration procedure required. General partners end up bearing heavy and unnecessary risks of the business.
C-corporation
These traditional corporations are currently retained by most large organizations globally. The C- Corporations are governed by a board of directors, officers, and bylaws. Stock certificates are also issued to the initial shareholders. Formal paper work is filed in relations to stipulations within the state where the corporation is set up.
Advantages
The corporation ensures protection of the owners’ properties through separation of actions of owners from those of the corporation. The business is a legal entity that can act on its own; therefore, can sue or be sued without involving the stockholders and other officers. Shareholders have powers to vote for the directors based on their number of shares as stipulated in the articles of incorporation. Shareholders can freely transfer their shares without consultations.
Disadvantages
Lengthy and bureaucratic procedures are followed during incorporation. Decisions are made by officers and director, and thus the decisions may not align to the wishes of shareholders. These organizations are subject to corporate taxes that translate to additional costs to the organization. This corporation is subject to double taxation, since shareholders are also taxed on their dividends (Lau & Johnson, p.249).
S-corporation
An organization has first to move to a C-Corporation before being upgraded to the status of an S Corporation. However, an S-Corporation cannot accommodate more than 100 shareholders. Moreover, it is the responsibility of these shareholders to pass their corporate income, deductions, losses, and credit. S Corporations have one class of stock.
Advantages
Shareholders have the privilege to choose their profits and the extent of their losses. The corporation is also not subject to double taxation as opposed to C-Corporations for the corporation reports the flow of incomes and losses on members’ personal tax return, hence avoiding double taxation.
Disadvantages
The corporation has only allowable shareholders, thus restricting partnerships and alien shareholders. The corporation is also selective on some certain financial institutions, insurance companies, and some domestic and international sales corporations. For a small business, joining this corporation is complicated, as one has to fill some forms to be granted permission .
Limited liability company
This business organization has a membership of 10 to 20 members, but it should not exceed 50 members for professionals. Members’ property and shareholders are protected and thus cannot be used to settle financial obligations of an organization.
One of the advantages of this form of a company is that shareholders’ wealth is protected. The company is also a going concern since the death of any member cannot affect the continuity of operations. However, the company is subject to double taxation since both the company and shareholders’ dividends are also taxed.
Recommendations
From the case presented above, it is evident that the business has outgrown its capacity as a sole proprietorship. Since the organization had not yet formed any form of the corporation, the owner should upgrade the business to a limited liability company. The organization needs to increase its earnings, thus leading to an increment in profits that can cater for the increased expenses in relation to those of other corporations. A limited liability company could suit the organization, as it is easier to form in comparison to the S and C corporations.
Although the company is subject to double taxation, I strongly recommend this form of business organization. For the case of these other corporations, there are stringent measures, as stipulated by regulations governing the formation of these organizations. With the expansion of a business, an organization is likely to seek services of expatriates because such a move comes along with inventions and innovations mostly in technology.
This aspect will be a crucial idea for the business that is dealing with timber products. Improved technology would ensure proper utilization of available resources and introduction of new designs. Although I support strategies outlined by S Corporations, I would not recommend it because this form does not favor alien shareholders.
I strongly recommend a limited liability company as it would ensure wealth of shareholders is safeguarded. Moreover, the sole proprietor was used to dealing with a small number of employees; therefore, recommending companies that would require many shareholders would amount to incompetence. A limited liability company is suitable, as the owner will only have to deal with less than 50 shareholders, and thus management becomes easier.
Reference
Lau, T., & Johnson, l. (2011). The Legal and Ethical Environment of Business. Irvington, NY: Flat World Knowledge.
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