Any person can start a business, but they must do so responsibly to have a better shot to success. One of the most important to be considered is the business structure. An understanding of all the available options and their respective impacts is very vital for any start-up business. Apart from the business structure, financial statements are also necessary to track the financial capability of the company. It is also a way of keeping records of the firm’s assets and income generating activities. This paper will focus on the specific details regarding the business structure and financial statements.
Legal Categories of an Organization: Tax-Related Advantages and Disadvantages
There are three main legal categories of business organisations: corporations, sole proprietorship, and partnership. A sole proprietorship is one who owned and ran by one person. The owner is the final decision maker, and he or she has all the powers to make whatever changes they want within the business. A partnership, on the other hand, is a business that has two or more people. , and they are also responsible for deciding their roles within the firm. Some of the factors considered while distributing the functions include the amount invested and the skill-set of each. As such, it is essential for every partner to have a lawyer present to help them make reasonable decisions and provide solutions for any future disputes. The final category is corporations which entail those businesses that have very many shareholders. It is the most complex category to start and run as it has very many requirements.
There are several tax-related advantages and disadvantages for each of these groups of businesses. Maybe the most advantaged group in terms of taxation is the sole proprietorships. Here, the process of taxation is straightforward and does not have too much paperwork involved. In most cases, the taxes of the business and that of the owner are combined, hence paid as one set. As such, the owner is only taxed on the total income received, including that generated by the business. However, the disadvantage is that the owner is responsible for all sets of self-employment taxes. Such requirements include medical and social security taxes, which usually are catered for by the company.
A partnership also shares the same advantages as those of a sole proprietorship. The process of taxation is not complicated as the partners are required to file their taxes independently. Each includes the losses and profits generated by the business in their income tax. As such, the company is not taxed as a separate entity from the owners. This design ensures that the members share the profits and losses of the business fairly among themselves. Also, similar to the sole proprietorship, every partner’s income is liable to the self-employment income tax which includes the social security and Medicare taxes.
Finally, a corporation has the most complicated tax system of the three categories. First, each corporation must have a federal tax identification number since the business is not tracked the same way a sole proprietorship is monitored. As such, it is quite a process when starting a corporation because of the legal and federal procedures involved. Another disadvantage is the fact that a company may be taxed twice within the same period. The first part is the normal process which considers the profits, while the second part includes the dividends of each shareholder. The advantage, however, is that the taxes are lower than those paid by partnerships and sole proprietorships. They are filed separately from the income of the shareholders and are only calculated on the profit made by the company within a given period.
Selecting a Business Structure
Before I start the process of deciding which business structure is the best for me, I will first consider a few things. Some of these factors include whether I have a partner, my current financial stability, whether I need and can access a loan, and the amount of time I am willing to sacrifice for the business. Considering my options after answering the questions above, I would prefer to go with a partnership. I currently have a reliable partner with whom we share common ideologies, and I know him as much as he knows me. Our current financial status is not that great but we can both access loans from our respective banks. Since I am currently working on something else, I will need someone to run the business diligently whenever I am not around. Therefore, a partnership fits perfectly to my current needs and the partner is also willing to work with me as long as we have one objective.
Every business has financial statements which are necessary for keeping financial records and help in making future decisions. The financial statements that would be found in a partnership include income statements, balance sheets, and cash flow. Income statements will help me and my partner track down the net income generated by the business every year. Cash flow, on the other hand, will give us an idea of how we have spent our profits on the organisation. A balance sheet will be crucial when we will be looking for potential investors as it will help them make their decision considering the current state of our business.
There are three different business structures, and each of them has some advantages and disadvantages. It is essential for anyone aspiring to be an entrepreneur to understand what each of them entails before making their final decision. A sole proprietorship and a partnership are advantageous because of the simple tax system. On the other hand, the percentage of taxes paid by a corporation is quite low compared to the other two.