A firm, is a business organization that seeks to make profits out of the professional services it offers its client base. Firms can be of various types depending on their structures and ownership. The three main types of firms, however, include sole proprietorship, partnership, and corporation (Gitman et al, 2018). The sole proprietorship firm is one owned by a single person while the partnership is owned by two or more people. The corporation, on the other hand, is a firm owned by multiple people. Each firm has its advantages and disadvantages.
A significant advantage of sole proprietorship is that the owner makes all major decisions pertaining to the company. The owner does not have to consult of confer with anyone on decisions such as location, investments, and employees among other decisions revolving around the operations of the business (Dennis-Escoffier &Fortin, 2016). This is unlike in partnership and corporations where owners have to consult among and between themselves before making crucial decisions. Another advantage of sole proprietorship is that the owner is the recipient of all benefits. He or she is not legally bound to share the profit with anyone else. On the other hand, in both sole proprietorship and corporation firms, the law requires that profits are equally shared among or between the owners of the firm.
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While sole proprietorship has significant benefits, it also has its drawbacks. One disadvantage of sole proprietorship revolves around liability as an individual (Gitman et al, 2018). In case a firm is faced with a law suit, the owner is individually or personally liable. Further, if the entity wins the case, the owner might be forced to sell the firm and in some cases personal assets to settle the debt. For a partnership firm however, each member has unlimited personal liability. Based on the partnership rules, debts incurred by the business are supposed to be legally paid off by all partners. This is regardless of the partner that entered into the bad contract. In other words, all the partners of the business are liable for the debts. The disadvantage of unlimited liability is that a partner can be held severally liable meaning that if the one who made the bad contract is unable to pay, other partners will be forced to pay from their personal assets. The merit is that one partner does not have to bear the debts of others because prior to the decision, consultation and conferring must have been done between the partners.
A corporate firm, usually creates a legal entity for its operations that is completely different from its shareholders. The transactions of the corporation are made under the legal entity. Shareholders of the firm, are therefore not held personally liable for debts incurred by the operations of the firm. Creditors and lawsuits are limited to collect debts from assets and profits of the corporation (Dennis-Escoffier &Fortin, 2016). Personal assets of shareholders are not liable for debt repayment. The only disadvantage is that the shareholder’s money invested in the company extends to the liability.
Partnerships and sole proprietorships are alluded to report their profits and losses directly to the government form. However, they are not required to record business charges with the Internal Revenue Service (Slemrod et al, 2017). Corporations on the other hand, are liable to tax assessment. In contrast to corporations, sole proprietorships and partnerships have less progressing and paperwork. Corporations are required to have more than one meeting on an annual basis while sole proprietorships and partnerships do not need to hold meetings. Further, corporations are required to strictly keep financial records yet sole proprietorships and partnerships do not need to have such records or make budgetary explanations to the state and federal government alike.
References
Dennis-Escoffier, S., & Fortin, K. A. (2016). Taxation for decision makers . John Wiley & Sons.
Gitman, L. J., McDaniel, C., Shah, A., Reece, M., Koffel, L., Talsma, B., & Hyatt, J. C. (2018). Corporations: Limiting Your Liability. Introduction to Business .
Slemrod, J., Collins, B., Hoopes, J. L., Reck, D., & Sebastiani, M. (2017). Does credit-card information reporting improve small-business tax compliance?. Journal of Public Economics , 149 , 1-19.
