Running head: LEGAL FORMS OF BUSINESS
Entrepreneurship is one of the cornerstones of the American way of doing business. Many businesses are organized each day. Business owners are fortunate that there is a form of business for just about every entrepreneurial need.
Legal Forms of Business
The various forms of business organization are established by state law. Therefore, businesses are formed according to rules in the state in which they are organized. An entrepreneur is the person or persons who form a business and the type of business they form is dependent upon their particular needs.
The simplest form of business organization is the sole ...view middle of the document...
The partnership agreement is backed by law. All partners are personally liable for the debts and business obligations of the partnership. This liability is unlimited. A partnership can operate under a fictitious name or the names of one or more of the partners. Like a sole proprietorship, a partnership is not taxed. The profits and losses from a partnership are included in the tax returns of each partner in a process called flow-through taxation. The most essential part of a partnership is that all partners share in the profits.
Three friends are drinking at a bar one night. They are unhappy with the service they receive and decide to open their own bar. Because a partnership can be formed orally, the partnership immediately exists. They begin drawing up their partnership agreement and have it registered with the state. Once they receive the proper licensing, they open “The Three Amigos” bar and grill. Because there is not much competition in the area, they go on to be very successful, sharing the profits of their business. They decide that they will stay together forever since the dissolution of a partnership can be time consuming and messy.
Limited Liability Partnership
The most beneficial aspect of a limited liability partnership is that the partners have limited liability for the debts and obligations of the partners so there is some protection for the partners’ personal belongings. Partners are only liable for the debts and obligations of the partnership up to the amount of the respective partner’s individual initial contribution. In most other ways, a limited liability partnership is very similar to a general partnership. Partners are taxed only on the income that is passed through the business to them.
Jeff and Dan are two medical school students at the top of their class in their respective fields of medicine. Both graduate with honors and successfully complete their residencies. While they are celebrating, their parents surprise them with a large cash gift to be used to open a medical office. After careful consideration, they decide to open a limited liability partnership. This is the best option for them because they will share the profits and only be liable for business debts up to the amount of their contributions. They will not be required to file corporate taxes and the IRS will tax them as sole proprietors. Dan does not handle the pressure of a new business well and begins frequenting the establishment owned by the three amigos down the street. Jeff is relieved that they decided on a limited liability partnership so that in the event Dan comes to work intoxicated and is negligent in treating one of the patients, he will not be held responsible.
Limited Liability Company
Both the limited liability partnership and the limited liability company share some aspects of a corporation and some other differences depend upon the state in which the business operates. Both provide legal protection for the...