Business Formation

Business Formation

Abstract:

This paper will discuss the advantages and disadvantages of forming a business as a partnership or corporation.  This paper will also explain the differences between equity and debt finances.

        Three personal trainers at a health spa have decided to start a health club that specializes in health plans for people over fifty years old.   The trainers are not sure what kind of business to start.  They don’t know if a partnership or a corporation is best. There are major differences in partnerships and corporations. They also want to know more information on debt and equity financing.

        Forming a business as a partnership can be rewarding. It is a good option for two or more people.  There are three people interested in starting this business, so they would qualify for a partnership.  A partnership is easy to establish and the startup cost are usually low.  The income profits from the business can be split, this helps when it comes to tax savings. Also, there is a greater borrowing capacity.  Most importantly it is easy to change the legal structure in the future.

        There are also some disadvantages to starting a business as a partnership.  In a partnership everyone is liable for their debts and the debts of the whole business.  Each partner is liable for the actions of all partners.  So if one of the partners make a bad decision, that bad decision you are liable for.  If a partner leaves or another joins then the value of the assets have to be valued and that could be a costly action.

        The other option is a corporation.  A corporation has its advantages as well. The first major advantage is that a corporation is a completely different legal business.  That means that there is separation between the owners and the business.  If the business fails it does not affect the individual finances of the owners of the business. Also if you are wanting the corporation to go public or raise capital by selling shares of the company the business would have to be a corporation.  Another great advantage is that no matter who leaves or joins the business will still be the business. There is no need to take a look at the assets.

        Corporations also have some disadvantages.  One of the major disadvantages is the cost.  There are fees for starting a corporation.  There is a filing fee with the state, franchise tax, miscellaneous fees for government and state and attorney fees. Corporations also have to follow certain guidelines. They are legally obligated to follow more guidelines than any other type of business. Another disadvantages is the taxes.  They have the possibility to consume more tax consequences.

        The advantages of a corporation outweigh the disadvantages.  A corporation is a better way to start a business than a partnership.  This is mainly because a corporation is a separate legal entity from the owners.  If the business goes south it does not ruin the partner’s personal finances.

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