Posted: September 20th, 2022

Entity Formation

Entity Formation

Entity Formation
The formation of a business entity is a crucial way of protecting a person from liability. It
also helps in saving money on taxes. A corporation or a limited liability company are examples of a business entity that is legally a separate person from its owners. Other examples of a business entity include proprietorships, partnerships, and government entities. Carla is a business owner who has a pet store, pet sales, and pet supplies outlet that invests only her money. She does not expect any profits for the next two to three years. The kind of business organization she identifies herself with is a sole proprietorship.
A sole proprietorship is a simple business form where a person who owns a business is personally responsible for any debts incurred (Cappellino, 2020). The owner can use his or her name or a fictitious one in its operation. The fictitious name is a trading name, in general, that doesn’t create a legal entity that is separate from the owner or rather the sole proprietor. The only requirements needed to open and operate such a business are the names and a secure local license. The owner is liable for any debt incurred in the business, meaning that creditors can bring lawsuits against that business owner.
The sole proprietorship has its advantages and disadvantages, and some of the advantages include its simplicity and affordability. It means that starting a business is a flexible choice since there is less paperwork (Khan, 2017). The owner only needs to fill out a government form, which is very simple during the business registration. The second advantage is operating flexibility and freedom. It means that it is easy to change a business under sole proprietorship if the owner finds that it is not working. One can even change business policies without much process or cost. It offers a high degree of fast decision-making opportunities and control.
The disadvantages of a sole proprietorship business are such as unlimited liability. The business is personally liable for any actions taken regarding the business, including any debts incurred. Personal property or wealth is linked to the business because it doesn’t exist as an entirely separate entity. The second is difficulty during the raising of capital. It is hard to find potential investors and to raise capital in a sole proprietorship. Without a separate legal entity, investors find it hard to invest their money. The third disadvantage is the lack of financial control and difficulty in tracking expenses. In preparing a financial statement and tracking business expenses, a looser structure for a sole proprietorship can result in a lax attitude. There might not be enough time to track personal expenses and separate businesses.
Acquiring additional capital to help keep up with competitors or expand the business is not as easy as corporations and the rest. Three ways can be used in raising capital traditionally. They include the business owner making an additional contribution of personal funds. The second way is to increase the owner’s equity stake; the third is increasing the invested amount. The equity investment can be searched from outside sources, therefore giving an ownership interest in the company in exchange for capital. Again, the owner can seek debt financing or borrow money that must be paid back like the bank loan. The three methods, equity investment, owner investment, and debt financing, are effective methods to capitalize on operations.
In conclusion, most of the sole proprietors rely on loans and gifts from family and friends. The sole proprietorship is usually a popular business form since it is simple, easy to set up, and nominal. Sole proprietors are not forced to observe formalities like meetings and voting’s associated with more complex business forms. They can be sued using the business owner’s name and are mostly used as a stepping stone to more complex business forms. If a sole proprietor gets wronged by a second party, the lawsuit can be brought using his name.

References
Cappellino, A. (2020). How to Choose the Right Business Organization Form.
Khan, M. (2017). Seminar Paper on Sole Proprietorship Business.

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