What are the different types of legal structures and some advantages and disadvantages of
each?
There are many business structures to choose when one wants to start an enterprise – from
a sole proprietorship, partnership, and corporation. Each business structure has its operating
complexity, liability protection, legal, and tax implications (Spadaccini, 2004).
The sole proprietorship business structure is an arrangement where you are the sole
business owner and therefore fully liable for all debts and obligations of the business.
Advantages of this business structure include: easy to register, minimal start-up capital, direct
control of decisions and profits. Nonetheless, lack of liability protection is perhaps the biggest
disadvantage. Another disadvantage is lack of continuity in case owner is incapacitated.
Partnership business structure is when two or more people set up an enterprise to make
profits to be shared according to a legally binding agreement. Partners pool financial resources
that form the bulk of the working capital. Besides, each partner is jointly liable for any debt the
business incurs and partners are not required to file income taxes as a business entity. On the
other hand, a partner becomes liable for any negligent actions of other partners. Also, creditors
may claim a partner’s personal assets for compensation in case debts.
A corporation is a legal entity that is separate from its owners or shareholders. Board of
directors manages the business while its officer runs the day to day business. When a shareholder
dies or leaves the company, his/her shares are transferred to other shareholders, hence
guarantying continuity of business. It is not only easy to raise capital for setting up but a
corporation and attracts lower taxation compared to other business structures. One significant
disadvantage is tightly regulated by the federal governments and the State.
BUSINESSES AND THEIR LEGAL STRUCTURES 3
Discuss both reasons for and the risks of buying an existing business or franchise instead of
starting a business from scratch.
Buying an existing business or starting a new one from scratch will depend on your
financial status and your personals. There is no guarantee that when you start some business that
it will succeed – most start-ups fail to pick up. Owners of start-ups have to confront with
unknowns including whether your new customers will like your products and services. You are
also not sure that your new company will operate efficiently and make profits.
On the other hand, an existing business already has the goodwill of customers cultivated
over time, not to mention the status and reputation in the marketplace built over time. On the
other buying, an existing business has challenges, especially when it comes to valuation. It is
essential to do due diligence before purchase as might overpay the value and have difficulties
trying to recoup your profits. In addition, you might leave you with no money to invest and build
your newly acquired company. While company financial statements reveal a lot, they conceal the
vital. If not careful some company’s assets cannot be turned into cash or may have been
overvalued. An owner who has just acquired an existing company might get difficulties adapting
to company’s policies, procedures, and corporate culture. A new business owner might
encounter resistance from directors and employees
BUSINESSES AND THEIR LEGAL STRUCTURES 4
References
Hill, H. (2013). Buying an Existing Business Versus Starting a Business. Retrieved from
http://smallbusiness.chron.com/buying-existing-business-versus-starting-business-
2477.html
Spadaccini, M (2004). Ultimate Book of Forming Corps, LLCs, Partnerships & Sole
Proprietorships. (1 nd edn.) Entrepreneur Press.