Legal Forms of Business

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Consider each of the following forms of business: sole proprietorship, partnership, limited liability partnership, limited liability company, S corporation, franchise, and corporate form. Develop scenarios in which each of these forms of business would be the preferred form. For each scenario, justify why the corresponding business form is preferred.

The first form we consider is sole proprietorship. This is owned and run by one individual. So, the owner and the business do not have a legal distinction. Such a business is easy and quick to form and wind up, quick business decisions may be taken, there is strong motivation for the proprietor to perform, business secrets are maintained and there is close control over the business. However, from the legal perspective the owner has unlimited liability, the life of the business ends with the death of the proprietor, there is limited scope for growth, and managerial expertise is limited.

Let us consider a scenario where a local farmer wants to open a store selling dairy products. In such a business scenario, the sole proprietorship business is most suitable. Such a store can be easily opened, the farmer has full control, the need for capital is very limited, and the farmer is motivated to perform well. This is the reason why sole proprietorship is the best business form for such a scenario.

The second form we consider is the partnership. A partnership is one in which individuals enter into a contract, who in the spirit of cooperation agree to carry on an enterprise, contribute capital, skills, knowledge, and share its profits. Usually, there is a written partnership agreement and this is registered. Partnerships are easy to set up, enables the business to have more than one owner, attracts skilled and qualified persons, enables partners to specialize, and provides for mutual support.

Let us consider a scenario where three qualified Public Chartered Accountants get together to form a business. The best form for such a scenario is a partnership. Each person becomes a partner. This form is most suitable because the skills of each partner complement the skills of the other partners. There can be a synergistic combination among the partners leading to flourishing business. Even ...