Type of business formation
After retirement Anthony and Eric who have developed some form of liking to cooking have come with an idea of opening a restraint. This is a decision that has to be analyzed critically in order to establish the best business formation to indulge in. Their analysis should touch many aspects including the membership qualification, the amount of capital involved in the start of the business, the associated risks and benefits of the venture, and the type of business formation that shall favor their kind of business. For this case, the two entrepreneurs shall be considered to involve themselves in the partnership form of business which shall favor their type of business and also has some associated benefits to the two members.
Partnership form of business will be fit for the two entrepreneurs because it correctly defines their requirements for the formation. It defines a relationship that occurs between two individuals who have the same business ideas and have come together to trade and generate profit. Therefore, each partner shall be required to give a contribution in form of money, skills or capital with the main motive of making profit. To focus more on this form of business and its fitness on the two entrepreneurs, there is need of analyzing the characteristics of partnership form of business which are relevant to a small business formation (Bruce, 1994).
It will only require membership of only two members to start the business. There is no maximum limit on that, so incase of any expansion there is room for that. The contractual relationship to be created between the two will involve only mutual agreement between the parties which has already been established by them. Partnership is a lawful business which is the same as opening a restraint business on lawful conditions. Finally, this form of business requires utmost good faith to form. This can be achieved since the two partners are seen to have faith in each other for the smooth running of the business.
There are a number of advantages that Anthony and Eric can acquire from running this form of business. Among them is the issue of collaboration on membership and operation. The two partners can come together and pile their recourses which will eventually increase the level of capital contribution to run the business. In addition to that, there will be sharing of responsibilities which can lighten the workload that one person can undergo and hence increase the efficiency of operation and decision making.
It is better also to form the partnership form of business because of the advantages of evading heavy taxation. Taxation is imposed on the owner’s profit which is reported on the individual tax returns. Taxation here is reduced since it is only taxed once at the individual level as compared to a business formation like the corporations where there is experienced double taxation i.e. on the corporate level and the individual level.
Partnership has got a simple operating structure. During agreement to form the business, there are no complicated legal procedures required like; filing the formal drafted agreement, filing the a partnership certificate with a state office for the purpose of registration of the business name and gaining a business license, and filing an annual fees like for the corporations. All these requirements can be very expensive for the two partners and can be avoided if they decide to form a partnership business.
Finally, partners are able to acquire capital easily because of the time awarded to them and by the fact that they can get loans at better terms. This is possible because, the partners can be able to guarantee the acquired loans with both their personal assets and that of the business. This will guarantee large loans for the partners and also increase the capital base for the business. Banks also see partnership business as a less risky business to offer loans than the corporations. Finally, partnerships attract many potential investors who bring about capital to the business and hence possibility of expansion.
There is also a need to consider the disadvantages that Anthony and Eric can face when forming this type of business. First, there might be an establishment of a conflict on certain crucial decisions in the operation of the business. For example, the two may disagree on what course of business to take when tying to expand the business. This can however be controlled by drawing a partnership agreement that defines the best course of decision making and how to deal with disagreements when they arise. In additional to that, it is presumed that any decision that one partner makes binds all the other partners and they shall be bound to fulfill it (Bruce, 1994). If the business can no longer support you, then all the personal properties and assets can be at stake as they can be sold and this happens whether the partners are aware of the actions of another partner or not. This will also mean that the personal property of every partner shall be at a risk.
Another disadvantage is that, partnership is vulnerable to death or departure of one of the partners. There is no perpetual existence of the partnership. If one member withdraws due to certain reasons then the partnership shall be dissolved and will no longer be operational. Partnership also has its existence depending on the owners of the business. This will mean that a member’s ownership can never be transferred to a different person without the consent of all the other partners. If there is a disagreement on the same, then there will no longer be a legal transfer of the ownership.
Anthony and Eric on the other hand can decide to consider other forms of business formations which they can be able to indulge in. the first one is the sole proprietorship. This involves a business venture which is owned by one owner. Therefore, the owner is bound to assume that there is unlimited risk based on his personal property. Corporations are business enterprises where the shareholders exchange their property and money for the purpose to the capital stock of the corporation. The corporation has the duty of conducting a business and realizing profits which it then pays to its shareholders. The S corporations are another type of business entities that are formed to pass the incomes and losses of the corporate through their shareholders for federal tax purposes. They do this in order to avoid double taxation. They are however the same as the corporations. Finally, the limited liability company is a business structure that is allowed by the statute (Bruce, 1994). They are similar to the corporations but the owners have limited liability for the debts and actions of the company. Therefore, these business formations should be considered by Anthony and Eric when determining the type of business to venture.
Bruce, A. (1994). Entrepreneurship and Dynamic Capitalism: The Economics of Business Firm Formation and Growth. Mahwah, NJ: Praeger