Business Entity Selection, Advantages and Disadvantages

Tung Vu

Angela Schmit

Course: Business Law

Date: 11/18/2018

Business Entity Selection, Advantages and Disadvantages

The choice of entity is one of the most important decisions that a would-be business owner has to make. Many types of business entities exist, and business people have to go through the available options before settling on the one that best suits their needs. One should understand that each business entity has different tax and legal consequences. Also, there is no specific entity that is suitable for a particular type of business or business owner. Part of the reason for this is that business situations for individuals vary considerably. The manner in which a business owner manages available resources and information may also influence the success of the entity. Some of the factors that may influence the choice of an entity include the needs of the owner, the experience of the owner, the characteristics of the business, the needs of the business, the location of the business, and the size of the business. Although no rule can guide entity selection, some business operations are better suited for certain entities. For instance, a large corporation is better off as a limited liability company than a sole proprietorship. Therefore, the selection process has advantages and disadvantages.

One of the advantages of entity selection is that it gives the owner the freedom to choose what he or she wants. The liberty that comes with entity selection can influence the success of a business (Franklin 573). If the business owner understands what he or she wants, he or she is likely to select the most appropriate entity, which leads to success. Indeed, many businesses are successful today because the owners made the right entity decision. With the right entity decision, setting up and running the business become easier. Another advantage of the right entity decision is that it helps the business owner overcome some of the challenges that may exist in the market. For instance, the business owner can overcome problems relating to running a business by making the right selection. Each business entity has its own managerial and resource demand, and choosing the wrong one can lead to a failed venture (Potter 13). If a business person, for instance, desires to remain small and avoid complexities of large-scale operations, he or she may be well-advised to maintain a small sole proprietorship as opposed to starting a limited liability company.

Another advantage of business entity selection is that it gives the business owner flexibility regarding operations. The selected business entity will influence the owner’s contribution to the national economy through taxation and other legal measures. In this regard, how an individual chooses to register his or her business will influence the involvement in the national economy (Potter 19). In most cases, people who take part in business also create job opportunities for others, and this influences the level of success for the entire nation. Business entity selection also helps people to decide what works for them, especially when they are forming a business as a group. Some types of entities are better than others when the owners operate as a group. With this great flexibility and involvement of people, people are always encouraged to go into business. The thought that one can do a wide variety of businesses is satisfying because it increases the morale to start and run a successful organization. If choices were limited, then not many people will be willing or able to join in. indeed, various entities cater to the needs of a wide variety of audience.

Entity selection may be advantageous, but it also has many disadvantages. One of these disadvantages is that the availability of many choices may confuse potential business owners. Notably, not many people who are not already in business understand how different business entities work. Therefore, trying to start a business without prior business knowledge can be a difficult undertaking. In most cases, people who want to start businesses must receive some form of guidance and assistance from experienced business owners and or lawyers. Unfortunately, those who assist people make the right entity choice may have personal biases and can fail to match the prospecting business owner’s situation with a perfect entity, which is another disadvantage (Franklin 573). People starting businesses may not give full closure about the same because they may fear that those listening to them might steal the idea. Therefore, the person trying to assist them to set up a business may give an improper advice based on what the business owner has said. Also, the prospecting business owner may have difficulty understanding too much information given to them at once. A prospecting business owner may have to take a crash program on business entities.

Selecting a business entity may also be disadvantageous because it is expensive. The costs associated with starting a business arise from two major places. The first source of the expenses is related to legal fees paid to the lawyer and the government. For one to start a business, he or she must make some payments to the government to acquire a certificate. The exact amount of payment that the individual will have to make will depend on the jurisdiction where the business is being registered. Also, the prospecting business owner will need to pay the lawyer assisting him or her to identify the most appropriate entity based on their situation. The second source of expenses is gotten from changing a business type. In many circumstances, business owners decide to change the entity type after some years when they realize that the business situation and the entity type do not match. Such changes are often costly. Deciding the type of entity can also complicate the process of starting a business and lengthen the period involved. A person has to become familiar with different entities before choosing the right one, and this can be time-consuming.

Different types of business entities exist. They include sole proprietorship, limited liability companies, and partnerships. All the three entities above are determined by two important questions. One of them is about the would-be owner of the business. A lawyer assisting an individual to form a business will ask the individual to identify the would-be owners (Potter 39). The second important question concerns the sharing of revenues and losses from the business. The answers to these questions might help an individual decide on what is best for him or her, but it may not be enough. Other questions that one might have to consider include those regarding resource availability, the nature of the business, and the market where the business will operate. Without a doubt, some businesses are easier to start than others in that they require little experience and resources. Others are complex and require sophisticated individuals with access to sufficient resources. For instance, one can start a small general retail shop more easily than a supermarket, even though both may be sole proprietorships.