SUBDOMAIN 310.1 - BUSINESS
Competency 310.1.2: Organizational Forms
- The graduate can select the appropriate form
of organization for a business
310.1.2-01: Differentiate between a sole proprietorship and general partnership.
310.1.2-02: Differentiate between a general partnership and a limited partnership.
310.1.2-03: Identify the distinguishing characteristics of C-corporations.
310.1.2-04: Identify the distinguishing characteristics of S-corporations.
310.1.2-05: Recognize the characteristics of a limited liability company (LLC).
310.1.2-06: Determine the appropriate business form
for a given situation.
As you work on this task, ask yourself why one form
organization would be selected over another, particularly for a small business
. What are the advantages and disadvantages of each form
entity characteristics owners should consider fall into these seven categories:
• Liability: What are the limits on liability and protection of not only business
assets, but personal assets and future earning power of the owner beyond this particular business
• Income taxes: What are the features of each business
entity that affect the amount of federal, state, and local income taxes paid by the business
• Longevity or continuity of the organization: What features of each form
relate to forced dissolution of the business
• Control: Who has ultimate control over important decisions? How much control does the owner have to grant to others?
• Profit retention: What portion of the profits does the owner have to give up because they have to be shared with others? How does this affect return on investment?
• Location: What are the implications for moving or expanding the business
into a different state? Will a separate legal entity have to be created or new documents filed in the new state? Are there advantages or disadvantages regarding how state taxes will be assessed?
• Convenience or burden: What additional requirements or extra workload are placed upon the organization to comply with all reporting, meeting, and other regulatory requirements?
A manufacturing business
produces a variety of wood moldings, hardwood doors, high-end kitchen cabinets, and specialty cabinets and bookcases for dens, home libraries, offices, etc. The business
owner has been operating as a sole proprietorship, but is thinking of changing to a different type of organization. The company has been quite profitable for its size. Profit before taxes for the coming year is expected to be just over $600,000.
While considering this change, the owner has thought about the various functions of the business
operation and different types of risks and potential liability that accompany each function. For instance, trained employees usually install cabinets, but when the company has a backlog of work, the owner must occasionally hire outside installers on a subcontractor basis. Although the company has not yet had such a problem, the owner has wondered what might happen if an installer were to make an installation error and a cabinet
were to fall off the wall and injure someone. Also, all of the delivery drivers possess licenses required for the trucks they drive. The owner is concerned about a delivery truck becoming involved in an accident. In addition, the owner is concerned about a shop worker being injured on a saw or shaper, or a load falling off of a forklift and injuring someone.
The owner is unsure what would happen with bills and other liabilities if the business
were to fail for some reason. Although the company has ample insurance, the owner has heard of juries awarding judgments that exceed the insurance coverage and wipe out all personal assets.
The owner is planning to expand the business
, both by expanding its market geographically and by adding a second factory in an adjoining state. To accomplish this, the owner will need to increase the investment in capital assets. One way of obtaining funds would be to sell a share of the business
to a partner, but the owner is not sure how that will impact potential liability. Another possibility is to sell stock in the company. This way the owner might be able to retain control of the company by having family members serve as officers in the corporation.
The owner is also concerned about profit that will be shared with partners or investors, the amount of income tax each year, and continuation of the business
under control of the officers in the corporation if the owner were to die.
The owner is aware of terms like S-corporation, C-corporation, LLC, and limited and general partnerships that describe different forms
organizations but does not fully understand the business forms
The owner has hired you to explain the advantages and disadvantages of each type of organization compared with those for each of the other types, including the type of organization the company is currently using. In your report to the owner, format your response so that it is easy to make comparisons among the six forms
of organization. You should use a listing approach rather than discussing several concepts in the same paragraph.
A. Write a report (suggested length of 5??"7 pages) about the forms
organizations listed below. Your report should have a subheading for each business form
with a brief description of the business form
and a brief discussion of the key characteristics, advantages, and disadvantages of that form
1. Differentiate among the following forms
by explaining how at least six of the seven key characteristics listed in the introduction to this task apply to each of the following organizational forms
a. Sole proprietorship
b. General partnership
c. Limited partnership
f. Limited liability company
B. Write a memorandum (suggested length of 1??"2 pages) in which you analyze your findings by doing the following:
1. Recommend a specific form
of organization that should be used in the given situation.
2. Justify why that is the best business form
for this situation.
C. If you choose to use outside sources, include all in-text citations and references in APA format.
Note: Please save word-processing documents as *.rtf (Rich Text Format) files.
Note: For definitions of terms commonly used in the rubric, see the attached Rubric Terms.
Note: When using outside sources to support ideas and elements in a paper or project, the submission MUST include APA formatted in-text citations with a corresponding reference list for any direct quotes or paraphrasing. It is not necessary to list sources that were consulted if they have not been quoted or paraphrased in the text of the paper or project.
Note: No more than a combined total of 30% of a submission can be directly quoted or closely paraphrased from outside sources, even if cited correctly. For tips on using APA style, please refer to the APA Handout Web link below.
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