Question

Critically discuss the advantages and disadvantages of each legal form of business organization.

Answer 1

These are the legal forms of business with advantage and disadvantage-

Sole Proprietorship- This is a very simple form of business where only one person runs the business and he/she is responsible for all the profit and debt.

Advantage- It is easy to set up and wind up and owner gets all the profit. Owners can deduct loss from the personal income tax.

Disadvantage- Owner is responsible for all the debts.

General Partnership- When two or more people create a legal entity to work for a common goal, is called partnership.

Advantage- Easy to set up. Owners may deduct the loss from the personal income tax.

Disadvantage- Owners are personally liable for debt and other liabilities of the partnership.

Limited Liability company- This is a form of the business that is done for profit motive but liability is limited to the capital invested. Members are not personally liable for debts of the company.

Advantage- Owners are not personally liable for any debt of the company.

Disadvantage- It is more expensive to create than sole proprietorship and partnership.

Corporation- It is a separate legal entity from its owners. Corporation is run by shareholders. There are following forms of corporation:

1. S corporation
2. C corporation
3. B corporation
4. Not for profit corporation.

Advantage- Separate legal entity, shareholders enjoy the independency and they are not personally liable for any debt of the corporation.

Disadvantage- It is more expensive to establish rather than other forms of business. Documentation and legal formalities are more in corporation than any other form of business. In case of C corporation, double taxation may be there.