The Most Appropriate Business Structure Law Company Business Partnership Essay

Published Date: 02 Nov 2017

a. Three close university friends who have recently qualified as dentists;

b. A group of 35 accountants who recently met during a networking event who wish to establish a boutique accounting practice aimed at professional sportspeople. (2500 Words)

When an individual or group of individuals chooses start a business, they must settle on on a legal structure for that business. Typically the structure can either be a sole proprietorship, a partnership, a limited liability company (LLC), or a corporation. Contrary to popular belief there's no right or wrong choice that can be deemed a perfect fit for all parties. The main criteria to which the decision of choosing a legal structure should be to comprehend in detail how each structure works and subsequently pick on that would appear to be most suited to the needs of that particular business. The main aim of choosing one particular structure is to ensure that their investment is protected, profitability is maximised and taxation benefits are reaped to the full. The owners of the business must also take into account all of the business options available to them along with the laws to abide by. Deciding which type of business structure to take can also be dependent on the resources available to the individual(s) and the knowledge they already possess.

A partnership commonly consists of a group of people who have similar or specific training to generate revenue. For a small business venture such as three close university friends who have recently qualified as dentists, the logical choice would be a partnership.

A partnership is an association of two or more persons engaged in a business enterprise in which the profits and losses are shared proportionally. The legal definition of a partnership is generally stated as "an association of two or more persons to carry on as co-owners a business for profit" (The Revised Uniform Partnership/RUPA Act 101 [1994]). The persons who own the business are individually called partners and collectively called a partnership.

It is a structure that would make good business sense as primarily personal liability isn't a major concern. In the case of scenario a, an initial small service business such as a dental practice in which the likelihood of being sued is highly unlikely and for which the start-up costs are low therefore not borrowing vast sums of money. A partnership is also relatively straightforward and inexpensive to establish and maintain which would be ideal for recently qualified dentists who already carry a heavy debt burden from their dental studies. Each of them brings investment, skill and expertise into the business whilst business risks are spread across three partners and so are the profits.

Further advantages that the 3 students can gain from forming a partnership including available capital and credit, combined knowledge, clear and uncomplicated decision making channels, as well as a degree of regulation control. When there are a trio of partners that will be involved in a business such as this, it tends to profit from of more skilled and knowledgeable people as well more financial resources. Partnerships tend to be larger than sole proprietary business which means they have vaster earning potential and their credit ratings are generally healthier.

Partnership interests are ordinarily not freely transferable in relation to management authority and partners are evenly accountable for business debts, the partnership structure is not favoured by equity investors. The qualities that make them unattractive to potential investors, however, make them attractive to lenders. In the main, banks look more favourably upon partnerships than LLC’s and small corporations. This could prove to be pivotal if the trio of students in terms of seeking start up capital as well as further down the line if they decided to expand the size of their business to a wider scale in the future.

Each partner can also recognise one another’s knowledge and skills involved in the business which minimises the possibility of any conflict or confusion within the business. The diversity of skills makes it easier to run the business with 3 trained professionals. A 3 way partnership also allows for decision making to be more efficient as tight knit trio who are involved in day to day operations. Further time is also saved as a partnership has much less red tape than a corporation so there isn’t a requirement to send financial statements to the government or file financial statements to be made public.

Be that as it may, there can be a select few disadvantages for the students to set up as a partnership. Primarily all 3 business partners are responsible for one another actions. If one partner chooses to make a certain decision or perform an action that negatively affect the business, it affects all partners involved and each partner would be held accountable. This could however be avoided if there is regular level of consultation between the three parties before making any major decisions.

A clash in organisational cultures or a change in the goals of one partner can be another probable cause of conflict. General partners also have unlimited liability for the firm's debts which could prove to be a genuine disadvantage when one partner has greater financial resources than the other two partners.

Moreover any profits earned by the partnership are given to the each partner specified in the article of the partnership which could well become a disadvantage if it doesn’t reflect the contribution each partner has made to the business. If one partner has a poor work ethic and contributes far less than the two other partners, they will still receive an equal profit share as stated in the partnership agreement. This is a potential cause of conflict.

To prevent any of the issues mentioned above as well as any other potential, the three student partners should have a foolproof legal contractual agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, how much time and capital each will contribute and what steps will be taken to dissolve the partnership if that time should ever come. Of course it seems extremely premature to consider dissolving a partnership before it has even begun but years down the line issues could arise which could cause a rift in the partnership so with precautionary measures in place, further problems can be avoided.

It is without question that the most appropriate structure for the three students would seem to be a partnership. As newly graduate students, neither party is likely to have extensive financial or management expertise, but as a trio they can share what knowledge they do have between them as well providing financial and moral support to manage their business venture. Also being partners would be favourable in regard to banks as they would be more willing to grant loans to cover start-up costs. If things go well, the business can grow and further investors can be brought in to expand their business to a wider market bringing higher revenue streams. Taxation is fairly simply in this structure; however the downside being that if the business folds, each partner is accountable for debt. In short, the partnership is the most suitable due to the low cost, lack of complexity and scope for easy expansion.

For a group of 35 accountants who recently met during a networking event who wish to establish a boutique accounting practice aimed at professional sportspeople, the most appropriate business structure would be either a limited liability company (LLC) or corporation.

An LLC is a non-corporate business whose owners actively participate in the organisation's management and are protected against personal liability for the organisation's debts and obligations. Crucially there is no limitation on the number of shareholders an LLC can have which allows for the possibility of inviting new shareholders with fresh expertise and impetus. In addition, any member or owner of the LLC is granted a full participatory role in the business's operation.

The limited liability company is a hybrid legal entity that has both the characteristics of a corporation and of a partnership. An LLC provides its owners with corporate-like protection against personal liability. It is, however, usually treated as a non-corporate business organisation for tax purposes.

Meanwhile a corporation can be defined as an organisation formed with state governmental approval to act as an artificial person to carry on business activities which can sue or be sued, and can issue shares of stock to raise funds with which to start a business or increase its capital.

Forming and operating a corporation can be rather complex and expensive, but can be fruitful for certain businesses. The main aspect of LLCs and corporations that can appeal to businesses is the limit they provide on the owners' personal liability for business debts and court judgments against the business. Another critical factor could be income taxes as it is possible and completely legal to establish a limited liability company or a corporation in a manager that will allow the business to benefit from favourable tax rates. In certain situations the business may even be able to store away its earnings at a considerably low tax rate. In addition to this, an LLC or corporation could be able to offer an array of fringe benefits to themselves as well as the staff and deduct the outlay as a legitimate business expense.

A corporation unquestionably has certain rewards that the 35 strong group of accountants would duly benefit from. One key advantage is limited liability. Since the corporations’ assets and liabilities are separate from its owners, characteristically the stockholders are not held responsible if the corporation folds in business. Their liability is limited to the amount of their initial investment in the company.

Taxation can be seen as another advantage of setting up as a corporation. Depending on the finer details of the corporation structure, the group of accountants can elect to have pass-through taxation on their personal taxes as a means to avoid double taxation.

Furthermore, a business with an Inc. or LLC attached after its name is often viewed as being more credible to external parties as it imparts professionalism and indicates that the company is legally established. If the group is looking to garner more partners, clientele (professional sportspeople in this case), or wider public interest, they are more likely to do so if they choose some form of incorporation.

There are however several disadvantages that can arise from operating as a corporation. Principally the hefty set up costs incurred. Starting a corporation take a lot of time and money. Owner should expect to such expenses such as state filing fees, franchise taxes, lawyer fees and numerous other government fees. Corporations are required to file article of incorporation, bylaws, corporate minutes, certification of good standings and ample paperwork. All paperwork must be completed on a regular basis in order for the business to continue their operations.

Corporations are monitored and scrutinised very closely whilst being subjected to rules of entities for various government bodies which means the corporation will have many more requirements to adhere to and to do so they need to keep up to date and organised administration documentation to demonstrate their compliance.

However a case could also be made that opting to down the LLC path might be favourable over a corporation. As the aforementioned business is to have a sizeable group of 35 accountants involved, the LLC offers more in terms of flexibility than a corporation would in the sense that profits and core managerial responsibilities can be administered. Moreover, establishing and maintaining a limited liability company can be considered less intricate and more cost effective than a corporation.

That said there can be situations where setting up as a corporation will be advantageous to the business. For instance, unlike in other business legal structures, a corporation can allow for the issuing of stock certificates to its owners and therefore be an ideal entity if the business is seeking external investors or merely reward their most prominent employees with a series of stock options. Having the option of issuing and selling additional shares of stock can also be is especially helpful when banks are being rigid with money and reluctant to lend.

This is the suitable structure for them as it will allow each individual to contribute in a way that allows them to concentrate on their area of expertise. Most importantly with this form of business each partner is protected against other partner’s personal liability. Essentially this type of structure enables them to work together as a partnership, but it addresses their main concern of having to be responsible for other group member’s debts.

Interestingly the simplest form of business entity is one I have yet to mention - a sole proprietorship. With little government regulation, they are the simplest business to set up dissolve, relatively cheap and uncomplicated to establish with ownership of all profits. Unfortunately it can immediately be ruled out for the two cases above as if one is to set up a sole proprietorship; he/she must be the only owner. A group of 3 or 35 would not meet the criteria to set up as sole proprietors.

It has to be said however, that there is no finality when it comes to choosing one structure over another, as the initial choice of structure does not have to be a permanent one. A business has the freedom to start up as a partnership for example and later on, if the business is growing rapidly or there is greater risk of personal liability increasing, the business owners can choose to convert the business form to a limited liability company or a corporation should they see fit.

Ultimately making the decision to start a business is a monumental step to which requires the utmost commitment and hard work. When a group of individuals in this instance has identified their business idea, it is imperative that they choose the appropriate legal form of business entity.

In order to do this, the owners of the business need to conduct thorough research and determine the goals they wish to achieve from their business and establish the needs of your business as it grows. This decision should also not be made without sufficient counsel from a lawyer or legal representative, an accountant, and other advisers. Choosing the appropriate business structure is the first step in achieving these business goals and once they have done so, it gives them a solid foundation on which to build on.