The most important thing in the world of business is to own a business entity. It is good for both you and the society, and all will derive benefits from it. However, I will choose a partnership type of business. The reason I chose partnership is because, it is a type of business that can allow me to share the ownership with two or more people. In doing so, each partner will have a chance to contribute to the prosperity of the business. Therefore, the partners in the business will have to contribute equally in terms of skills or experience, money, and property (U.S. Small Business Administration). The other most important thing is that the profit and losses of the business are shared equally among the partners. The act lessens the burden from an individual. Also, partnership form of business is the best since more than one person is involved in the decision-making process. Making a relevant decision in a business is vital to the prosperity of the same business. When the persons involved make the right decisions, then the chances of hitting the target are high. Similarly, a partnership has the legal agreement that outlines how the decisions would be made.
It is enlisted as an unincorporated business that is operated by one person. However, there is no real distinction between the owner and the business itself. Precisely, the profits and losses from the business, debts, and liabilities are all entitled to the owner.
Steps to Form
Forming a sole proprietorship is simple since it does not require any formal actions. Therefore, the owner of the business automatically runs the business. In other words, there are no outlined steps to follow when starting a sole proprietorship business. However, it is important if the owner obtains the licenses and permits so that he/she can legally operate the business.
Personal Liability for Owner
Sole proprietorship depicts unlimited personal liability. The owner in this type of business can be held accountable or responsible for the debts and any other activities carried out by the business. It is because the owner and the business do not have a legal separation.
The business under sole proprietorship is not taxed separately. However, the owner of the business will have to pay all income taxes. The taxes will include estimated taxes and self-employment. Additionally, the sole proprietor will have use Schedule C and the standard form 1040 to write a report on income, losses and the expenses incurred.
First, the sole proprietorship is a simple and inexpensive business to form. A person can easily obtain the necessary legal document (license and working permits) required to form the business. The costs involved in establishing the business is minimal, and any person with a business idea can afford.
Second, the owner has complete control over every activity in the business. The sole proprietor makes his/her own decision about the business without consulting or getting assistance from outside.
Lastly, it is easy for the owner to prepare the tax reports. The business is not taxed separately, and the tax requirements are easy to fill by the sole proprietor. Additionally, the tax rates that the owner is charged are favorable, and they are considered to be the lowest of the business structure.
First, a sole proprietor finds it difficult to raise money for the business. It is hard to get credit from banks because most sole proprietors are perceived as untrustworthy when it comes to repaying the loans. Also, there are no investors who will put their resources in a sole proprietors business. Sometimes the stocks might go unsold hence no profit would be made to add more stock.
Sole proprietorship portrays unlimited personal liability. The owner of the business is held responsible for the debts and various duties of the business. Therefore, the owner faces the risks that might be incurred by the business.
The owner faces the heavy burden of controlling the business. The burden of success and failure of the business are all under the owner’s shoulders.
It is a type of business structure where the ownership is shared among two or more individuals. Each partner in that business will have to contribute equally towards the success of the business. Similarly, the partners will have to share the debts or losses incurred by the business.
Steps to Form
First, the partners will register the business with the Secretary of the State’s office. Individuals are required to register their business with the state. Second, the partners will use the name in the partnership agreement to establish the business name. However, those who will change their name will be required to file a fictitious name. Third, after the registration of the business, the partners will obtain the licenses and permits that will allow them to operate the business.
Personal Liability for Owners
Partnership type of business entails joint and individual liability. Therefore, the partners are responsible for the actions they make. Also, they retain the full responsibility of the business debt and actions of the other partners.
It is important for a partnership to obtain a tax ID number or permit. Therefore, the business is required to register with Internal Revenue Service (IRS). Also, it will be good if the partnership registers with the state and the local revenue agencies around. The business under partnership does not pay taxes, however; a partnership is required to file a report (annual information return) about the business operations. The taxes for partnership include the following; the annual return of income, excise taxes, and employment taxes (Peirson, Brown, Easton, & Howard, 2014). Moreover, the partners are also subjected to other taxes that include estimated tax, income tax, and self-employment tax.
Forming a partnership is always easy, and also the cost is less. It is inexpensive for people to come together and form a partnership. They will only spend more time in building the agreement.
Partners equally invest their resources in the business. Therefore, the financial commitments of the business are shared equally. The act will help them to generate more money and also boost their loans credibility.
Partnership business is advantageous since the partners can share their expertise and skill. Therefore, the skills from the partners complement each other.
A partnership is bound to a lot of disagreement. Some businesses have multiple partners and sometimes disagreement arises due to poor decisions made.
The profit obtained from the business is shared. Since the business is jointly owned, the partners will share the benefits equally regardless of the contribution in terms of resources and time.
Lastly, the business experiences joint and individual liability. All the partners are held responsible for the actions they make and also actions of the other partners. In case a partner has debt, his/her personal assets will be used to cover it up.
Limited Liability Company
It is a type of business structure that entails the limited liability characteristics of a corporation. Also, it portrays the operational flexibility and tax efficiencies of a partnership type of business. The members who are the owners of the business can consist of one or more persons.
Steps to Form
First, the members will choose the business name. However, when choosing the name, it should be unique from the existing LLC. Also, the name should have the words “Limited Company” at the end. There are some names that your state has restricted, and hence your business name should not fall under it.
The second step is for the business to file an article of the organization. It will help in legitimizing the operations of the business. The owners of the LLC are required to file with the Secretary of State.
Third, the owners are required to create an operating agreement. It will help in ensuring that the LLC operate smoothly and also, it structures the organization and finances of the company.
Fourth, the owners should obtain the license and work permit of the company. After the registration is through the owners can obtain the permit to start the business operations.
The fifth step is to hire workers. Now that the business is in operation, it would be ideal if qualified workers are hired to carry out the various activities. Lastly, the owners will announce the business to the public. The company can advertised through the local newspapers, televisions and social media.
Personal Liability for Owners
The company exhibits limited liability. Therefore, the members are not liable or responsible for the actions of the company. Every member is protected from personal liability.
The federal state does not recognize the LLC as a business that can be taxed. However, the members are required to pay the federal income tax through their personal income taxes. Similarly, the LLC are required to file tax returns as a sole proprietorship, corporations or partnership (U.S. Small Business Administration).
First, there is minimal registration paperwork that is required for the LLC. Also, the cost incurred is less. Moreover, the business involves less recordkeeping.
The members share profit, and they decide among themselves the percentage required for each one of them. They also, share the company’s losses.
The company exhibits limited liability. The members of LLC are protected from the decisions of the company.
The members pay self-employment taxes since they are recognized as being self-employed. Therefore, they should contribute their income towards social security and Medicare.
The members of the company have limited lives. In case, one of the members leaves the business, and then the whole company will be dissolved.
It is a legal business that is independently owned by shareholders. The company involves costly administration fees, and complicated tax and legal requirements. However, the corporation always sells the ownership shares through the stock exchange.
Steps of Formation
First, the shareholders are required to establish the business name. They will have to register the legal name of the business with their respective state government. In case the shareholders decide to operate with a different name, they will be required to file a fictitious name.
Second, the shareholders will register their business as a corporation. The process will involve filing the article of incorporation with their Secretary of State.
Third, the shareholders will obtain the license and business permit. It will act as the foundation to start the operations of the business. After the business permit is obtained, the corporation can decide to hire workers and announce through the media about the business.
The corporation exhibits limited liability. For this case, it is the corporation that is legally liable for the decisions that include debts and other actions the business goes through. The various assets of the shareholders are protected.
The corporation is required to register with the IRS, the local and state revenue agencies. After registering, they will obtain the tax ID number or permit. Additionally, the corporation will use its profit to pay income tax. They will pay tax when the company makes a profit and also when they pay the shareholders their dividends (Rünger, 2014).
The corporation has a great ability to generate enough capital. The shareholders contribute the capital, and also the corporation can sell their stock.
Second, the corporation can attract more potential employees. The business can offer competitive benefits that can lure and motivate experienced and high-quality employees.
Third, the assets of the shareholders are protected because of the limited liability feature of the corporation. Therefore, the corporation is held accountable for the debts and decisions made by the business.
Lastly, the corporate tax treatment is favorable. The owners pay the taxes from the profits made by the corporation. The business is also awarded a corporate tax rate that is usually lower in a situation of additional profits.
Forming a corporation is complicated, and it involves additional paperwork. The federal, state and the local agencies strictly regulate the corporation and hence they require more of recordkeeping and paperwork.
The corporation experience double taxation. The business is taxed when they realize profit and also when they pay dividends to the shareholders.
Forming a corporation requires a lot of time and capital. Venturing in such type of business is costly, and the shareholders will spend much time ensuring that it operates well.
Peirson, G., Brown, R., Easton, S., & Howard, P. (2014). Business finance. McGraw-Hill Education Australia.
Rünger, S. (2014). The Effect of Shareholder Taxation on Corporate Ownership Structures. Wiesbaden: Imprint: Springer Gabler.
U.S. Small Business Administration. (n.d). Retrieved from http://www.sba.gov
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