Choosing the Legal Form

of Business/Options for
Entry
by: Katline Ruth Tabotabo
Sole Proprietorship
The sole proprietorship is the simplest business form
under which one can operate a business. The sole
proprietorship is not a legal entity. It simply refers to a
person who owns the business and is personally
responsible for its debts. A sole proprietorship can operate
under the name of its owner or it can do business under a
fictitious name, such as Nancy's Nail Salon. The fictitious
name is simply a trade name--it does not create a legal
entity separate from the sole proprietor owner.
One of the great features of a sole proprietorship is the
simplicity of formation. Little more than buying and selling
goods or services is needed. In fact, no formal filing or
event is required to form a sole proprietorship; it is a status
that arises automatically from one's business activity.
 Advantages of a sole
proprietorship
include:
Owners can establish a sole
proprietorship instantly, easily
and inexpensively.
Sole proprietorships carry little, if
any, ongoing formalities.
A sole proprietor need not pay
unemployment tax on himself or
herself (although he or she must
pay unemployment tax on
employees).
Owners may freely mix business
or personal assets.
Disadvantages of a sole
proprietorship include:
Owners are subject to
unlimited personal liability
for the debts, losses and
liabilities of the business.
Owners cannot raise
capital by selling an interest
in the business.
Sole proprietorships rarely
survive the death or
incapacity of their owners
and so do not retain value.
 Partnership
If your business will be owned and operated by several
individuals, you'll want to take a look at structuring
your business as a partnership. Partnerships come in
two varieties: general partnerships and limited
partnerships. In a general partnership, the partners
manage the company and assume responsibility for
the partnership's debts and other obligations. A limited
partnership has both general and limited partners. The
general partners own and operate the business and
assume liability for the partnership, while the limited
partners serve as investors only; they have no control
over the company and are not subject to the same
liabilities as the general partners.
 Advantage: Disadvantage:
Personal liability is a major concern if
One of the major advantages of a you use a general partnership to
partnership is the tax treatment it structure your business. Like sole

enjoys. A partnership doesn't pay tax proprietors, general partners are

on its income but "passes through"
any profits or losses to the individual
partners.
personally liable for the partnership's
obligations and debts. Each general
partner can act on behalf of the
partnership, take out loans and make
decisions that will affect and be binding
on all the partners (if the partnership
agreement permits). Keep in mind that
partnerships are also more expensive to
establish than sole proprietorships
because they require more legal and
accounting services.
 Here are some other issues you'll want the
agreement to address:
How will the ownership interest
be shared? It's not necessary, for
example, for two owners to equally
share ownership and authority.
However, if you decide to do it,
make sure the proportion is stated
clearly in the agreement.
How will decisions be made? It's
a good idea to establish voting
rights in case a major disagreement
arises. When just two partners own
the business 50-50, there's the
possibility of a deadlock. To avoid
this, some businesses provide in
advance for a third partner, a
trusted associate who may own
only 1 percent of the business but
whose vote can break a tie.
When one partner withdraws,
how will the purchase price be
determined? One possibility is to
agree on a neutral third party, such
as your banker or accountant, to
find an appraiser to determine the
price of the partnership interest.
If a partner withdraws from the
partnership, when will the
money be paid? Depending on
the partnership agreement, you
can agree that the money be paid
over three, five or 10 years, with
interest. You don't want to be hit
with a cash-flow crisis if the entire
price has to be paid on the spot on
one lump sum.
 Corporation
A corporate structure is perhaps the most
advantageous way to start a business because
the corporation exists as a separate entity. In
general, a corporation has all the legal rights of an
individual, except for the right to vote and certain
other limitations. Corporations are given the right
to exist by the state that issues their charter. If
you incorporate in one state to take advantage of
liberal corporate laws but do business in another
state, you'll have to file for "qualification" in the
state in which you wish to operate the business.
There's usually a fee that must be paid to qualify
to do business in a state.
You can incorporate your business by
filing articles of incorporation with the
appropriate agency in your state. Usually,
only one corporation can have any given
name in each state. After incorporation,
stock is issued to the company's
shareholders in exchange for the cash or
other assets they transfer to it in return
for that stock. Once a year, the
shareholders elect the board of directors,
who meet to discuss and guide corporate
affairs anywhere from once a month to
once a year.
While some people feel that a corporation
enhances the image of a small business,
one disadvantage is the potential double
taxation: The corporation must pay taxes
on its net income, and shareholders must
also pay taxes on any dividends received
from the corporation. Business owners
often increase their own salaries to reduce
or wipe out corporate profits and thereby
lower the possibility of having those profits
taxed twice-once to the corporation and
again to the shareholders upon receipt of
dividends from the corporation.
Cooperative
A cooperative in its simplest sense is formed
when individuals organize together around a
common, usually economic, goal. For business
purposes, a cooperative refers to the creation of
a nonprofit enterprise for the benefit of those
individuals using its services.
 Advantages of a
Cooperative Organization:
A cooperative organization is
owned and controlled by
members.
It has a democratic control:
one member, one vote.
This type of organization has a
limited liability.
Profit distribution (surplus
earnings) to members is
carried on in proportion to the
use of service; surplus may be
allocated in shares or cash.
Disadvantages of a
Cooperative Organization:
A cooperative organization
entails longer decision-
making process.
It requires members to
participate for success.
Extensive record keeping is
necessary in this form of
organization.
It has less incentive, and
there’s also a possibility of
development of conflict
between members.