Legal Forms of Business Paper Law/531 June 3rd, 2011 University of Phoenix Legal Forms of Business Paper Selecting the best form of operating a business depends on the type of business the owner wants to run. The owners have to pick the structure that best meets their needs. “The selection depends on many factors, including the ease and cost of formation, the capital requirements of the business, the flexibility of management decisions, government restrictions, personal liability, tax considerations, and the like” (Henry Cheeseman, 210, p. 529)
Moreover, choosing the right form to run a business will also determine how the business is organized, how the cash flow is, and how the business is taxed. “The most common forms of business organization are: sole proprietorship, general partnership, limited partnership, limited liability partnerships, limited liability company, and corporation” (Henry Cheeseman, 210, p. 529). According to the situation given, the best form is limited partnership. Limited partnership refers to the types of owners the business will have, general (managers) and limited partners (investors).
In this sense, Monica, and Susan will be the managers of the businesses because they both will operate the business with their skills, Susan with her computer graphics skills and Monica with her marketing skills. Whereas Vic will be the investor providing some capital to run the business, she will not be part of management; Vic will act as a passive investor. In limited partnership, managers have unlimited liability and the investors have liability to up the amount of their capital contributions. General partners will control everyday activities in the business. Monica and Susan will be responsible of the business debts as well.
Despite, limited partnership is more complex than general partnership; this is the best form to meet Vic’s, Monica’s and Susan’s needs. Vic will have limited personal liability for business debts as long as she will not participate in management. Monica and Susan will have the possibility of raising money without involving outside investors once they can incorporate enough money to run the business by themselves. Sole proprietorship was precluded because the business will be run by Monica and Susan because they have the necessary skills to be successful entrepreneurs.
In this scenario, Vic will provide capital and will take a passive role in managing the business, she sill obtain profits because of her involvement in the business. For not facing some problems among them, they will have to reach an agreement generally written to state how shares will be handled; this is common called a limited partnership agreement. “This agreement sets forth the rights and duties of the general and limited partners; the terms and conditions regarding the operations, termination, and dissolution of the partnership; and so on” (Henry Cheeseman, 210, p. 547).
The limited partnership agreement will set forth the transactions that managers and investors can approve. This document also states the how earnings and losses will be distributed among the partners. Limited partners have also the right of being informed by general managers about the business performance and the business financial status. If Susan or Monica wants to admit a new partner, the new candidate to operate the business can be included if Vic approves this, unless the agreement document states otherwise. Limited partnership is easy to set up, and to appeal investors as limited partners.
This agreement is good to set arrangements for general partners to use their skills, and to decision-making regarding the business. Limited partners can drop the business without the need for the limited partner to be dissolved. The business form of corporation was not selected because of the process of forming a corporation takes time and money, compared with the rest business forms. Corporations are often audited by the government and have to deal with more paperwork to comply with the regulations of the states in which the business will run. Also, in corporations dividends paid o shareholders are not deductible from the business income; it may turn out taxing this income twice. Corporation is a business form more expensive to create than sole proprietorship or partnership. There is more paperwork in corporation than other forms of business. Corporation carries several tax disadvantages, and pays taxes on its own income. Whereas limited liability partnership was not chosen because of the disadvantages it offers for this kind of business that Vic, Susan, and Monica want to run. Limited liability partnership is more expensive to create and to maintain than sole proprietorship and partnership.
In this form of business if one partner leaves, the business is dissolved. Limited partnership is a good method for Vic, Susan, and Monica to use the limited partnership as a form of business because of the advantages it presents for their good. Through this business form, they can share the profits with a minimum of effort. This form is also easy to attract investors. Monica and Susan can raise additional capital because of the liability of limited partners. There is also less paperwork, and it is easier to manage than corporation. Selecting the best form of business is a strategic decision that entrepreneurs face.
This is an important decision because of the implications it brings to the business, regarding its ongoing legal and tax consequences. The best form of business will depend on the business goals and many other factors with big impact on the business performance. Choosing the legal form is crucial to determine the organization and performance of any kind of business. Entrepreneurs must measure the pros and cons before undertaking any businesses. Word count: 901 Reference Cheeseman, H. (2010). Business Law (7th ed. ). Colorado, DE: Prentice Hall.