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Forms of Business Entities

Name

Institution

Course

Instructor

Date
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Forms of Business Entities

Sole Proprietorship

The business is run and owned by one individual. The sole owner can create and

negotiate a contract with another party. In this context, the pro entails the easy

negotiation process as only a few individuals are present, only the owner and the

contracting party. Another pro is that only a few challenges may arise as there clear and

precise agreement terms. The major con is that one party may make wrong decisions

due to poor negotiation skills. The sole owner approves and signs a control. The

advantage of this is that the approval and signing process is quick, while the con is that

there is a high probability of mistakes as the process depends on one individual.

The sole owner also has the liability associated with the contract. The advantage

is that one may decide to dissolve the business, while the con is that one may become

financially overburdened, especially when the liability is huge (Foss et al., 2021). The

sole owner is taxed via personal tax income and thus must report all incomes and

losses. The pro is that the owner can deduct the cost of health insurance, and the con is

that taxes increase depending on the income. On the contract of sale, the sole owner

contract another party to sell all assets since there is no direct transfer of ownership in

this entity. The pro is that few formalities are required; thus, it is a quick process, while

the con is that there is a need for other individuals' services.

General Partnership

The involved parties participate in creating, negotiating, and approving the

contracts. The advantage is that there are enhanced contractual terms as more parties

are involved in the negotiation process, while the con is that more time is spent as all
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parties must come to a consensus. All the partners must approve and sign the contract;

hence the pro is that they only sign contracts that are favorable to them. The con is that

the approval process takes a longer time. All the partners bear all the contract liability

(Armstrong et al., 2020). The pro is a less financial burden as it is shared equally among

the partners. The con is at times; there are conflicts between the partners concerning

arising liability.

The general partnership is a pass-through entity where each partner reports their

income share and losses on their tax return and pays accordingly. The major pro is that

the partners avoid double taxation, while the con is that there is low protection. In the

context of the contract sale, all the partners must participate and approve the direct

transfer of the partnership on the basis of all individuals honoring their obligations, such

as settling debts. The pro is that the direct transfer is quick but only when all the

partners honor their obligations. The con is that some legal procedures must be

followed, which may cause delays.

Corporation

It is a business legal entity separate from its owners. It has executive officers or a

board of directors responsible for the creation, negotiation, and approval of the contract

on behalf of the corporation. The pro is that decisions made are wise and fair as it

involves a large number of individuals. The con is that there are many delays. The

corporation's CEO is the only authorized person who signs a contract on behalf of the

corporation (Rock, 2020). Meaning only a few signatures are required in the approval

process, while the con is that the CEO may sometimes sign contracts that do not favor

all the shareholders.

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The corporation bears all its liabilities as it acts as a separate legal entity. The

pro is that its shareholders do not suffer losses individually. The con is that individuals

operating on behalf of the company may lead the corporation into making losses. The

corporation is taxed by the corporate tax, with different rates for local and international

corporations. The pro is that it deducts medical insurance for families and fringe

benefits. The con is double taxation, as shareholders pay tax on dividends received. In

the context of the contract to sale, the board of directors reviews and approve the

decision and then abide by the laid legal procedures. The major pro is that the

corporation sale must be carried out in good faith, while the con is that the transfer

process takes a long time due to procedural technicalities.

Limited Liability Company

In this business entity, the members are responsible for creating and negotiating

a contract in the absence of the manager. The pro is that the negotiation and creation

process continues even in the manager's absence, while the con is that there would be

negotiations of unbeneficial contracts, especially when the manager selects. However,

the manager is responsible for approving and signing the contracts; thus, the approval

process is quick. The con is that the manager may approve contracts that do not favor

some of the members.

The LLC itself shoulders any arising liability as it operates as a separate entity

from the members (Lidstone, 2021). The pro is that members have no personal liability

towards the business, and the con is that members may knowingly get into bad

contracts. The business entity is treated as a pass-through entity means it does not pay

taxes as an entity, but members pay a personal income tax. The pro is that there is no
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double taxation, while the con is that there are fines if the member does not file their

returns. The sale of the business depends on the members' agreement. The pro is that

all members must approve the sale, while the con is that there are lengthy legal

procedures.
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References

Armstrong, R., Hannum, E., Fisher, L., & Schlessinger, L. (2020). Farmers' Guide to

Business Structures: LLCs, Corporations, Partnerships and More.

https://doi.org/10.13016/fcia-zd8f

Foss, N. J., Klein, P. G., Lien, L. B., Zellweger, T., & Zenger, T. (2021). Ownership

competence. Strategic Management Journal, 42(2), 302-328.

https://doi.org/10.1002/smj.3222

Lidstone, H. K. (2021). LLC or Inc.? Entity Selection for a Small Business. Entity

Selection for a Small Business (November 23, 2021).

https://dx.doi.org/10.2139/ssrn.3938182

Rock, E. B. (2020). For whom is the corporation managed in 2020? The debate over

corporate purpose. European Corporate Governance Institute-Law Working

Paper, (515), pp. 20–16. https://dx.doi.org/10.2139/ssrn.3589951