Legal Forms of Business

Business entities are an integral part of business practice and economic productivity. An effective business practitioner must understand the characteristics of the major types of business entities, as these attributes can dramatically affect the nature of the business's relationships. Before beginning to conduct business, one should always weigh the benefits and burdens of the different types of business entities and make a conscious decision about which type of entity to form to conduct one's business.

Depending on the type of business, the people involved, and the goals of the business, some entities may be more appropriate than others for a particular business. To make the decision about the appropriate type of entity to form, one should consider factors including the following:

  • creation and maintenance—the effort associated with forming and maintaining the entity
  • continuity—the continuity or stability of the organization upon given occurrences
  • ownership and control—the ownership rights and control of those involved with the business
  • personal liability—the potential for personal liability of those involved with the business
  • compensation—the compensation and division of profits among business owners
  • taxation—the taxation of the organization's earnings and its distributions of profits to the owners

Weighing these and related factors, which vary in consequence depending on the entity, informs the choice of the type of business entity best suited to one's business. Examination of these characteristics will make obvious the effect of these attributes on stakeholders of the business entity. The decision of which entity is right for a particular business impacts many facets of a business's operation, including accounting, management, and finance.

Check Your Knowledge

Choose the best answer to each question:
Question 1
Which of the following business entities imposes unlimited liability on all of the owners?
limited partnership
general partnership
limited liability partnership
S corporation
Question 2
Which of the following is a characteristic of a sole proprietorship?
A sole proprietorship is subject to double taxation.
A sole proprietorship has perpetual life, beyond that of the owner.
A sole proprietorship is formed simply by someone carrying on an activity seeking a profit.
A sole proprietorship provides limited liability to its owner.
Question 3
What are the owners of a limited liability company (LLC) called?
Question 4
Which of the following is the greatest disadvantage of a C corporation?
The C corporation is subject to double taxation.
The C corporation allows for limited liability.
The C corporation requires a board of directors.
The C corporation provides a means of seeking investment through issuing equity and debt securities.
Question 5
Which entity allows for the owners to elect whether they manage the business or they appoint managers?
limited partnership
limited liability company
general partnership
C corporation