What are its advantages over a corporation?
Circumstances Favoring a Specific Business Form Before the rise in the availability of the various hybrid forms discussed, some states required certain activities to be carried on in the partnership form, most notably the licensed professions. The primary concern was that these professionals should not be able to escape personal liability for malpractice by incorporating their practices. As noted above, all states now offer an alternative to a general partnership for these professions. Today selection of a particular form is driven by market realities, as well as the founders’ desires for certain characteristics that were previously discussed. Some of those market realities will now be addressed. One consideration in the selection of an appropriate form is the total capital needed by the enterprise. Large businesses need billions of dollars. Only access to global capital markets (like the New York Stock Exchange) can fulfill this need. With only fairly recent exceptions (see the text box below), the only form of business that has met with success in these markets is the C corporation. In contrast, because partnerships do not offer limited liability, freely transferable interests, or indefinite life, they are (with few exceptions) not appropriate for ventures requiring large amounts of capital accessed via the financial markets. It is not rare to find someone with a great idea but insufficient resources to take the idea to market. Some investors, such as venture capitalists, seek out such persons. They will usually insist that the venture have limited liability, as would be true with a corporation or an LLC. [For more on venture capitalists, see www.nvca.org] Similarly, franchisors normally demand that franchisees operate their franchises in a business form with limited liability. A franchise is the right to exploit the franchisor’s intangible assets (trade name and business systems) and to partake of the franchisor’s marketing, purchasing, and other services. The key advantages to the franchisee are a proven product or service, turn-key implementation, and access to support. The franchisor gains by earning fees and by achieving accelerated market penetration using the capital of others (franchisees). Unfortunately, franchisor fraud and oppression are not unusual, so careful investigation is essential. Furthermore, premium franchises can be expensive. [For an extensive listing of franchise opportunities and their minimum cash requirements, see www.franchisedirect.com] With the development of such business forms as LLCs, LLPs, and S corporations, under most circumstances the disadvantages of the general partnership form are so severe that a person is usually well advised to avoid it. Questions—Part One 1. a. Why are corporations the dominant form of business based on revenues in the United States? b. What is meant by a “”? c. Why are gaining ground against “regular” corporations in the public capital markets? 2. a. Why are sole proprietorships problematic if a proprietor dies or is disabled? b. Do partnerships experience similar problems? Explain. 3. a. What characteristics of an LLC cause it to be the fastest-growing business form in the United States? b. What are its advantages over a corporation?
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