Sole Proprietorship, Partnership and Corporation
Abstract Starting a business with no funds or management experience can prove to be difficult. Comparing and contrasting, for the sole purpose of deciding which business type would be beneficial to the scenario given three business types were discussed. Sole proprietorship, partnership and corporation were reviewed. The outcome chosen was partnership being as it relates best to the scenario discussed. The idea of opening a business is not one to take lightly. Being an inventor and spending a lot of time on home projects, the idea to create a new home product that is easier and safer to use is very exciting.
Not being sure how to set up and get started on making plans to fund the business venture can be stifling. When it comes to manufacturing this new home product, the ideas that come to mind can make one unsure. However, this product can be adapted as well to benefit a whole range of products as well.
In the business environment there are three ways one can start a business. These business types are sole proprietorship, partnership and corporation. Depending on the type of business venture a person may be looking at, it is important to know exactly what each business type is.
According to Ebert and Griffin (2011) a sole proprietorship is a business that is owned and operated by one single person who is responsible for all of its debts. Sole proprietorship is appealing because that person has no one to deal with except himself or herself and starting up a business can be very simple. According to Ebert and Griffin (2011) there are low startup costs and the legal setup procedures are very simple. Also there are tax benefits that make sole proprietorship very interesting to consider. The discouraging side of considering a sole proprietorship is unlimited liability.
Ebert and Griffin (2011) stated, “A major draw back is unlimited liability: a sole proprietor is personally liable for all debts incurred by the business” (p. 46). So in other words, if your business fails not only can you loose the business, but you can loose all you have monetary-wise as well. The next business type to discuss is partnership. According to Ebert and Griffin (2011) a common type of partnership is general partnership. It is like a proprietorship except that multiple people can own the business. The nice part of the general partnership is the lexibility that is available to the partners. Investments can be varied according to the willingness of each partner. Ebert and Griffin (2011) stated, “And sometimes one partner invests all of the funds needed for the business but plays no role in its management: this person is usually called a silent partner” (p. 46). On the other side of this, one partner can provide the labor but no investment while the other partner puts all the money needed into the business. Eventually the partner providing all the labor can gradually receive some ownership.
According to Ebert and Griffin (2011), the most interesting part of the general partnership is being able to grow the business by adding talent and money. Banks give more money to businesses that are not run by a single individual. Because of this, partnerships can more easily borrow money and gain more investors as business becomes more successful. The major draw back of the general partnership is that like a sole proprietorship, unlimited liability is an issue. The reason for that is according to Ebert and Griffin (2011), all partners are responsible for the debt that another partner may bring into the business.
So for example, if in the business “Talley’s Towels” there are three partners, and two partners are doing fine but one partner brings in debt that all three have trouble paying off, when a collections agency come along all partners are affected. According to Ebert and Griffin (2011), another disadvantage would be difficulty in transferring ownership. So if one partner wants to retire, sell out, etc. they may not do so without the other partners consent. The last type of business a person may be interested in considering is a corporation.
Ebert and Griffin (2011) stated, “corporation is business that is legally considered an entity separate from its owners and is liable for its own debts; owners’ liabilities extend to the limits of their investments” (p. 48). There isn’t just one type of corporation there are a few different types, closely held corporations, S corporations, limited liability corporations, professional corporations and last but not least multinational corporations. According to Ebert and Griffin the closely held corporation is one where only few people have stocks in the business and they are not for sale publicly.
Publicly held corporation is when stocks are available for purchase to the public. An S corporation is when the business is ran like a corporation but is looked at similarly to a partnership. A limited liability corporation is where the owners are being taxed similar to a partnership but they get the ease of limited liability. Professional corporations are composed of professionals such as lawyer and doctors. Multinational corporations deal with stocks being traded internationally and managers maybe from different nationalities.
So as an entity itself the corporation can be sued or sue, buy and sell property or have as much an opportunity to be corrupt and be punished for its crimes. The biggest advantage according to Ebert and Griffin (2011), is limited liability which is when an investor is only liable according to the investment they put into the business. So if a corporation goes under the investors only lose what they put into the business. Another plus to corporations is that investments and stocks can be passed down to heirs, according to Ebert and Griffin (2011), this is known as continuity.
While transferring ownership is a benefit enjoyed by corporations, this can also lead to problems that a corporation must face. Ebert and Griffin (2011) stated, “tender offer-an offer to buy shares made by a prospective buyer directly to a corporation’s shareholders- a corporation can be taken over against the will of its managers” (p. 48). Along with a tender offer, it takes a lot of money to start a corporation and the government is involved more which leads to legal complications. A big disadvantage according to Ebert and Griffin is the profits that are earned by a corporation are taxed two times, this is called double taxation.
Understanding what all three-business types is, and the current situation with wanting to create a business for the new household product, the best solution would seem to be a partnership. Since the inventor has no financial skill or management skills, it would be ideal to find a partner that would be interested in providing financial support and be able to help manage the business venture. Also having a business partner would be favorable because banks would be more willing to give loans for startup costs.