Underpinnings of Business Law
The structure of a business determines its success or failure. Notably, a business structure determines the business management structure, liability, and available capital. In addition to this, the management structure also determines the shareholders liability, and control in the management. In brief, this paper will analyze different types of businesses. In this case, the paper will compare Tinker’s Home Security Service as a sole proprietor, general partnership, limited partnership, Limited Liability Company (LLC), and corporate business.
Tinker’s Home Security Service Matrix
|Sole proprietor||General Partners||Limited Partnership||Incorporated Business||Limited Liability Company|
|Personal Liability||Unlimited liability to owner.||Unlimited liability to all partners.||Unlimited liability to general partner. limited liability to limited partner||Limited liability to all shareholders.||Limited liability to all shareholders.|
|Management||Owner managed.||Partners managed.||Only general partners in management.||Professional management.|
|Taxation||Personal income tax of sole proprietor.||Personal income tax of partners.||Personal income tax of partners.||Corporate tax.||Personal income tax of members.|
|Ease of Formation||Quick and easy to form.||Easy to form.||Easy to form.||Tedious and long process.||Easy to form.|
Personal Liability Exposure
Evidently, a sole proprietor is the most common type of business formation. Essentially, there is no distinction business and the owner and the business (Schaffer, Aguati, Dhooge, & Earle, 2009). As a result, the owner is entitled to all profits. Similarly, he is also entitled to all liabilities. At Tinker’s Home Security Service, I am the owner and I enjoy all the business profits or losses.
Generally, a sole proprietorship business is managed by the owner. Notably, most sole proprietor businesses have the owner as the only employee (Emerson, 2009). Noteworthy, however, as the business expands the owner may hire individuals to assist in the business management. In the case of Tinker’s Home Security Service, I am the enterprise manager.
Ease of Formation
Generally, the formation of a sole proprietor business is easy, quick, and inexpensive. Importantly, if an individual chooses to form a business using a different name other than his name, he must choose an original name (Schaffer, Aguati, Dhooge, & Earle, 2009). Accordingly, there is no other business with the name Tinker’s Home Security Service. Moreover, it only took me only one day to form the business.
Sole Proprietorship Taxes
Importantly, since the business and the owner are one and the same thing, the business is taxed in the sole-proprietorship income. In this case, the sole proprietor pays taxes for both his personal income, and that of the sole proprietor business (Emerson, 2009). Notably, Tinker’s Home Security Service business does not pay corporate tax. Generally, the business profits are merged with my income, after which the income tax is calculated from the net of the two.
Ease of Formation and Liability
Importantly, this business is formed by at least two individuals hence the process is fast and simple. Generally, partners have to sign a partnership agreement. Additionally, the partners have unlimited liability in the business (Seaquist, 2012). In the case of Tinker’s Home Security Service partnership, the business has two partners, my husband Alexi and I. Additionally, we all have unlimited liability to the business. Additionally, as partners in the business, we share profits and losses equally.
Generally, all partners are involved in the management process. Consequently, the more the partners, the more difficult it is for the management process. Fortunately, in Tinker’s Home Security Service we are only two partners and the management process is quick and effective (Schaffer, Aguati, Dhooge, & Earle, 2009). Additionally, the partnership dissolves once one member leaves the partnership or dies. As a result, in case one of us leaves the partnership, the business will be dissolved.
Accordingly, the taxation of a partnership treats the business as one and the same individual as its partners. In this case, a general partnership files an information tax return that shows sales, expenses, and taxable income or loss (Seaquist, 2012). Correspondingly, it issues a K-1 statement to each partner dividing their taxable income as per their share ownership of the partnership. Similarly, the partners must include this portion of partnership income or loss on their personal income tax when calculating their income tax. Subsequently, once Tinker’s Home Security Service calculates the business income tax, it issues my husband and me a K-1 statement. Generally, I usually add my portion of the business profit to my income when calculating my income tax.
Ease of Formation and Shareholders Liability
Notably, a limited partnership has two classes of partners, the general and the limited partners. Generally, the former has unlimited liability while the later has limited liability. In the case of Tinker’s Home Security Service Partnership, my husband is the general partner while I am the limited partner (Schaffer, Aguati, Dhooge, & Earle, 2009). General, formation of a limited partnership is simple. Importantly, all partners have a duty of signing the partnership agreement that forms the rules for the partnership. Additionally, the partners register the business in the State Registrar using original names. In light of this, Tinker’s Home Security Service limited partnership took only two days to form.
Importantly, in a limited partnership, only the general partners are engaged in the active management of the business. Basically, once a limited partner engages in business management, they covert from limited partners to general partners (Seaquist, 2012). In brief, in the Tinker’s Home Security Service limited partnership; I am the general partner, while my husband Alexi is the limited partner. Consequently, he does not involve himself in the daily business operations.
Notably, the income tax is calculated in a similar manner for both the limited and the general partnership. In brief, the business tax is transferred to the owners depending on their owners’ share of the business. Importantly, once Tinker’s Home Security Service calculates the business income tax, it issues my husband and me a K-1 statement. Basically, I usually add my portion of the business profit to my income tax when calculating my income tax.
A corporation is an independent legal entity formed under the laws of the state. Consequently, the business may sue and be sued, acquire liabilities, and own assets without affecting the shareholders (Emerson, 2009). Generally, the shareholders in Tinker’s Home Security Service in this business have limited liability.
Ease of Formation
Notably, the formation of a corporation is a tedious, and lengthy. Importantly, it requires the shareholders to file articles of incorporation to the Secretary of State office. Additionally, there may be need to issue stocks, and corresponding share certificates to initial shareholders. In addition to this, there may be need for establishment of directors depending on each country’s regulations (August, Mayer, & Bixby, 2009). Further still, a business must conduct a name search, and use an original name. Importantly, a corporation mobilizes capital by selling shares in the initial public offer. Generally, the formation of Tinker’s Home Security Service took three months. In brief, this was a long period as compared to the time taken when forming a sole proprietor business.
Basically, a corporation is managed by independent board of directors and the company management. Importantly, the shareholders are not involved in the management of the business. Nonetheless, they ensure professional management of the business by voting for the board of directors who act as their watch dog (Seaquist, 2012). Importantly, Tinker’s Home Security Service Corporation has a Chief Executive Officer (CEO) and an independent team of management. Additionally, the corporation has a board of directors who ensure that the business is professionally managed.
Notably, since corporations are independent entities, they pay taxes their incomes in the form of corporate tax (Schaffer, Aguati, Dhooge, & Earle, 2009). Additionally, corporations may at times pay taxes twice; firstly they will pay the corporation taxes and then the taxes on dividends. Consequently, Tinker’s Home Security Service Corporation pays its taxes separately from those of its owners.
Limited Liability Company
Basically, all shareholders in this company are called members. Notably, all members of this business have limited liability. Consequently, their personal possession cannot be used to pay the company’s liabilities. As a result, the Tinker’s Home Security Service shareholders have limited liability and their personal property cannot be used to pay the company debts.
Ease of Formation
Essentially, all limited liability companies must have an original name. Additionally, these businesses must indicate the word “LLC” on its name. Moreover, the business name must not include words restricted by the states government such as “bank” or “insurance”. Further, the businesses are required to file the “articles of organization” form with the Secretary of State (August, Mayer, & Bixby, 2009). In particular, this article indicates the business name and location of the enterprise. Finally, the businesses are required to obtain an operating license after which they can start operating. Generally, the business formation is not long because it took Tinker’s Home Security Service LLC only one week to complete the entire process.
Basically, a LLC has either a member-managed or a manager-managed organization strategy. Generally, a member-managed system is where all the members of the LLC are involved in the decision making process of the business (August, Mayer, & Bixby, 2009). On the contrast, a manager-managed LLC has a few members and a manager involved in the decision making process of the enterprise. Consequently all the other individuals not in the management are passive members. In light of this, the Tinker’s Home Security Service LLC uses a manager-managed system. Importantly, this method has enabled the business to hire managers with specialized skills to head various business departments.
Generally, the federal government does not recognize a LLC as a separate tax entity. Consequently, all the federal tax liability are transferred to its members and paid through their income tax. Additionally, since LLC are not recognized as business entity for taxation purposes, the business must choose to be classified as either a single member LLC, partners in an LLC, or LLC filing as a corporation. The Tinker’s Home Security Service LLC is classified as a partnership for tax purposes. Consequently, all profits or losses are transferred in the income tax of the shareholders. Notably, this tax is paid by the shareholders when they are filing their income tax
August, R., Mayer, C., & Bixby, M. (2009). International business law: Text, cases and readings. Boise State. Pearson Education.
Emerson, R. (2009). Business law. (5th Ed.). New York. Barons Education Inc.
Seaquist, G. (2012). Business law for managers. San Diego, CA. Bridgepoint Education, Inc.
Schaffer, R., Aguati, F., Dhooge, L., & Earle, B. (2009). International business law and its environment.(8th Ed.). Mason, OH. South-Western Cengage Learning.