LIT 1 Task 1
Part A:
Business owners face a lot of challenges. In order to conduct their operations effectively businesses must be organized. The complex world of business is filled with the pressures of running a business, profit margins, decision-making, liability, Income tax, longevity, government regulations, control, expansion and future of the business and countless other things. In the United States businesses can be organized into one of three basic legal forms. * Sole proprietorship's * Partnerships * Corporations
These are further sub divided into different forms. Each form have certain characteristics that set them apart and they also have some advantages and disadvantages. Let’s closely look at all three forms and analyze why one legal form would be selected over the other for a small business. 1. Sole Proprietorship: These are the most simplest and common way of doing business in the United States. A sole proprietorship is an unincorporated business owned by one person. A sole proprietor may run the business himself/herself or may hire others to run it for them but the ultimate decision is that of the sole proprietor. In such type of business form there is no difference between the owner and the business.
Some important Characteristics of sole proprietorship's are as follows: * Liability: Sole proprietors suffer from unlimited liability. Since there is no difference between the owner and the business, the owner is liable for all debts and obligations the business has accumulated. Unlimited liability also puts all personal belongings including home, automobile, bank accounts etc. within the reach of the creditors. * Income Taxes: The sole proprietors and their business are taxed as a single unit. Having no legal distinction between the owner and the business, all the income generated by the business is treated as the personal income of the owner. * Longevity or the continuity of the organization: State laws state that a sole proprietor’s business activities cease at the owner’s death. * Control: Since the owner is the business, a sole proprietor has the total control over the total ownership of the businesses’ finances. The proprietor can do it all on their own or hire people to do it. * Profit retention: The sole proprietor keeps all of the profits. * Location (Expansion): Sole proprietorship's are easy to expand because of lack of formality. All states allow sole proprietorship's to operate under the name and personal responsibility of the owner. However if a sole proprietor wants to expand into a state that does require them to obtain a business license to conduct business in that state, they must register before conducting business. If a sole proprietor is using the business name different form the owner’s name called the DBA (doing business as), it must register that name as required. Depending upon the business the sole proprietors are engaged in, they may have to obtain state, local occupational, or professional licenses as required by the states jurisdiction. Apart from obtaining licenses, sole proprietors must obtain state tax permit, and collect and any and all state taxes according to the jurisdiction of the new state. He/she must also pay any income tax required by the new as well as the old state, depending upon rules and regulations of the state they operate in. For e.g., in the State of Texas, sole proprietor must register the DBA name before conducting business. * Convenience or burden (compliance): There are only a few instances when a sole proprietor has to register with the state or federal government. When the sole proprietor have to run their business under a separate name than their own they have to supply certain things to require license to operate. E.g., in the state of Texas, sole proprietor must register the DBA (doing business as) name.
Advantages of having sole proprietorship: * Simplicity: Starting a sole proprietorship is easy and simple. * Autonomy: The sole proprietor has the advantage of going into business being their own boss. The owner can expand business or contract it. He/she may virtually do whatever they want. * Profit: since there are no partners to share the proceeds, a sole proprietor keeps all the profits. * Single tax: the sole proprietors business is taxed as a single unit since they both are one and the same.
Disadvantages of having sole proprietorship's: * Limited Resources: The capital available to a sole proprietor is limited by his personal financial resources. For this reason sole proprietorship's are generally not practical in large business ventures. * Unlimited Liability: Another disadvantage of this form of business is unlimited liability. Since the owner and the business are one entity, the sole proprietor is responsible for any debts and losses incurred by the business. It puts all personal belongings in the clutches of the creditors. In short there is no legal protection from the creditors. * Limited Longevity: The business dies with the death of the sole proprietor thus cutting off the family’s source of income.

2. Partnerships: When two or more people come together to run a business it is called partnership. Partnerships are classified into; * General Partnership * Limited Partnership * General Partnership: General Partnerships are formed when two or more people agree to share profits and losses in a joint business venture. In this form of business partners are equally liable for the debts and other acts of the business.
Important Characteristics of general partnership are: * Liability: The partnership has unlimited personal liability. Meaning if the business becomes dissolved for any reason, including death of a partner, disability of a partner, each partner is individually liable for all of the firm’s debts. * Income Taxes: Like sole proprietorships, there is no federal tax for the partnership. Each partner is individually responsible for their personal taxes. * Longevity: The longevity of the business is based on the contract the partners had drawn up before the business was started in case of buyout or death. * Control: The control of the business is based upon what the partners agreed upon in the contract. * Profit Retention: All the profits go to the partners. * Location (Expansion): The move is quite easy for general partnerships. It is the same as that of sole proprietorship. The partnership has to register to do business in another state by filing for a DBA (Doing Business As). * Convenience or burden (Compliance): The partnership should have a contract drawn up stating what each partner has contributed to the business. What share of profit each partner will receive, duration of the partnership and the breaking of or dissolution of the business in case need arise.
Advantages of having a general partnership: * Partners keep all the profit. * Like in sole proprietorship, partnership is free from federal income tax. * Partnerships profits and losses pass directly to the partners and each partner is responsible for their individual income tax. * Partnerships are a vehicle pooling of capital, sharing of risk and talent.
Disadvantages of having a general partnership: * Unlimited personal liability. Each partner is equally liable for the debts and losses for the business. * The death of a partner may end the partnership – with serious consequences.

* Limited Partnership: Limited partnership can be defined as a partnership which is formed by two or more members having one or more general partners or one or more limited partners, where limited members shall not be bound by the financial obligations of the business beyond the extent of their investment. They are just investors who do not take part in day to day activities of the business.

Characteristics of Limited Partnerships: * Liability: The majority of the liability is the business is taken by the general partners. The advantage of having limited liability of the limited partners keep them from losing more than they invest.