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I am trying to understand the pros and cons of choosing a different type of entity (Limited liability, Corporation Partnership, franchises or sole proprietorship) which best suits each situation below...justifying why you have chosen the specific type of entity to do business in a particular form, or, in the case of an existing business, to change to a different business form.
Joe operates a local gardening and tree trimming business. Joe also does some light landscaping work for a few of his commercial accounts. Joe is very successful and has enough clients to keep him busy, along with at least three workers, working six days a week. Occasionally, a client rents a piece of equipment from Joe's business. Clients sometime take their time paying for Joe's services and, therefore, Joe is sometimes late paying his bills.
Joe's capital is only about $25,000, most of which consists of his new $20,000 truck and his assortment of lawnmowers, chainsaws, edgers, and gardening equipment. Joe's wife handles the books, yet is not involved in actual business operations. Should Joe continue to operate his gardening and tree trimming business as a sole proprietorship?
Maury and Sons is an oilfield-drilling contractor. Maury has been dead for years and Monty and Max, two of Maury's grandsons, now operate the business. Monty and Max each own 25% of the business (they acquired their interests from their deceased fathers, Fred and Barney). Two aunts, Wilma and Betty, own the remaining 50%. Wilma and Betty, each in their early 80s, have no children.
The business was originally a sole proprietorship. Maury brought Fred and Barney into the business, yet there is no formal partnership agreement. Wilma and Betty have never been actively involved in the business, yet were given their interests after Maury's wife Mable passed away.
Monty and Max want to continue to expand the business and, eventually, sell the business to a "consolidator" (a company that buys local businesses, usually in exchange for a combination of stock, cash, and debt). Should Maury & Sons continue as a general partnership?
Bear in mind, a corporation is the safest and most concrete form of business. Despite the well known Stock market, an over whelming majority of corporations are not publicly owned (stock based).
Corporations are only liable for the assets of the corporation. This personal protection is called Indemnification. Should there ever be a problem where a consumer or distributor needs to collect monies from the business, a corporation can only be sued or taxed for the assets that it owns (monies, properties, etc.) The individuals that work on the board are not personally liable. Decisions made in a corporation are made by the board of directors. If the board isn't in agreement about an issue, it doesn't happen. The board must agree on actions in order for them to take place. Small fees exist each year to be a corporation (usually less than $40)
In a limited liability partnership, the business is only liable for the contributions of each partner. I.E. if you and I started a business, and we each put $5,000 of our own money, we would each only be liable for $5000. If there were a problem, we could not have our wages garnished at future jobs because of a problem with our company. Decisions are made by the partners. (and we each own a certain part of the company) Additionally, if a decision is made by a partner, that partner is the only one liable. I.e. if you decided to do something without my consent or permission, ONLY YOU would be liable for the amount that you put in. I am protected by law from the unknown decisions of my partner.
In a general partnership, each partner is responsible for the other. All actions are understood to be the act of all partners. Therefore, I am equally responsible for any mistake that you or any other partner made. Additionally, we are liable for more than just the assets of the business or what we contributed to the business.
In both LLPs and general partnerships, partners can be bought out by their partners. Partners must offer their partner the option to buy them out before selling their ownership of the business to an outside party (to avoid a partner having to work with someone they hate, or are unable for other reasons to work with)
A sole proprietorship is the most basic business. There is no personal protection for the owner. They are personally liable for any and all actions of the business. Should an employee, consumer, or distributor sue the business, the owner is personally responsible.
In each of these cases, there is reason to believe that there could be problems with the current status. In landscaping, many accidents could take place in which employees or consumers could get hurt, and in turn sue. There are already problems with distributors getting paid on time. Joe may want to consider upgrading to a business type that offers him and his business some more protection.
Maury and sons may also want to upgrade their legal status. With changing hands and some partners wanting to eventually sell the business, and other maybe not wanting to, an upgraded status may be to their advantage as well. Something that offered the partners protection and allowed partners to buy out each others ownership of the company may be beneficial.
You now need to use this information to make your own decisions on what you see as the pros and cons of each.