CHAPTER 10
Choosing the Legal Form of Organization
SUMMARY AND AUTHOR’S NOTE
One of the important decisions made during the development of the business plan is the
determination of a legal form of organization. It is a decision that affects the company’s legal
ready. During that time the entrepreneur is incurring expenses, but there is no revenue coming in.
Often the entrepreneur has no employees and no real liabilities. That being the case, it makes no
sense to form a corporation and incur the mandatory minimum taxes that some states impose.
This chapter explores the various types of legal entities and how they might be most effectively
employed.
CHAPTER OBJECTIVES
After reading this chapter, students will be able to:
• Distinguish between sole proprietorships and partnerships.
CHAPTER OUTLINE
OPENING CASE: Partnerships Gone Awry
Chapter 110: Choosing the Legal Form of Organization 45
• Figure 10.1—Legal Forms of Organization
I. Making the Decision About Legal Form—determining the best type of legal form
II. Simple Forms: Sole Proprietorships and Partnerships—description of legal structures
• Table 10.1—Comparison of Legal Forms
III. Corporate Forms—descriptions of corporate structures
a. C-Corporation—definition of and requirements for C-corporation
i. Advantages
ANSWERS TO QUESTIONS ON KEY ISSUES
1. Assuming that you were running a successful consulting practice as a sole proprietor, what
would induce you to change the legal form to a corporation?
You might want to change to a corporate form if you were planning to grow the business
2. Why would you choose an LLC form over a partnership or an S-corporation?
The LLC benefits from continuity of life and free transferability of interests. As a limited
46 Chapter 110: Choosing the Legal Form of Organization
3. What kinds of businesses are well suited to the nonprofit legal structure?
Businesses established for charitable, public (scientific, literary, or educational), or
4. What key factors determine the strategic plan for the legal organization of the business?
1) Does the founding team have all the skills needed to run this venture?
SUGGESTIONS FOR EXPERIENCING ENTREPRENEURSHIP
1. Employing this text and additional research on the Internet, acquire a basic understanding
of the different legal forms of organization. Then, using a business that you are considering
2. Visit an entrepreneur whose business is set up as a partnership. How do these partners
describe the experience of setting up the business? How have they divided up the duties
and responsibilities? What key issues have they covered in their partnership agreement?