An Introduction to the Analysis of Business Law

What is business? Simply put, it is a commercial or mercantile activity engaged in as a means of livelihood. (Miriam-Webster, 2010) Businesses are typically organized as a sole proprietorship, partnership, or corporation. Sole proprietorship is the oldest, simplest, and natural type of organization. (Informationbible.com, 2005-2009) A proprietor reaps all the benefits and accepts unlimited liability of the business. Most small businesses are, or start out as, a proprietorship. A partnership, generally, is a relationship of two or more entities conducting business for mutual benefit.

(investorwords.com, 2010) Partners share both the profit and liabilities of the business. Although partnerships can be as simple as a handshake agreement, it is usually recommended that all agreements be written out, and signed. Other than having more than one owner, a partnership varies very little from a proprietorship. A corporation is defined as a legal entity, or structure, created under the authority of the laws of a state, consisting of a person, or a group of persons, who become shareholders. (allbusiness.com, 1999-2010)

A corporation is an entity separate than its members. The shareholders are only liable for their investment. Corporations are able to sell shares to help raise revenue. Sole proprietorship had many advantages and disadvantages. The most important feature is that the law makes no distinction between you, the sole proprietor, and your business. Virtually all the legal and tax consequences associated with sole proprietorships for from this essential element. (Poznak, J, n.d. page 1) Some of the advantages of proprietorship has to do with the overall simplicity of startup and running of the business. There is no state filing required for start up. You simply obtain required licenses, and start conducting business. As long as your business is not breaking the law, there are few legal requirements. As the sole owner of the business, you are free to make all the decisions regarding the business, with very little oversight from outside sources. (iaimember.com, n.d.) Sole proprietorship also has two tax advantages.

The first advantage is you only have to pay tax on your income once. Some corporations are taxed both at the entity level, and on the distribution of shares at the personal level of the shareholders. (iaimember.com, n.d.) The second tax advantage is that you can deduct your business losses to the extent of your total income that you may have from all sources, including interest, dividends, and gains from the sale of non-business property. If you are married and file a joint return with your spouse, your business losses will help offset their income, reducing your tax burden. (Poznak, J, n.d. page 2) With all the freedoms, lack of people over you, and general good feeling of paying fewer taxes, proprietorship may seem like the only organization that is right for you. However, proprietorship has several major disadvantages. The first, and most important, was already mentioned above.

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