Business Structures

There are numerous of types of businesses that entrepreneurs can choose to explore their accepted business ideas. This paper focuses on Sole Proprietorship, Partnerships, Limited Liability Companies (LLPs), and Corporations. A business that has one owner and is unincorporated business is known as a sole proprietorship, and it also happens to be one of the simplest forms of business to start as it only requires the owner, a business idea and capital. In the United States and Canada anone, there are in excess of 20 million individual propriety businesses, thereby making it the single most popular type of business ownership (Cooper et al, 2016). It is critical to note that the primary characteristic of a single propriety kind of business is the lack of legal boundary between the business and the owner. Since the owner of the sole proprietorship and the company are legally seen as the same, the owner bears personal responsibility for any liabilities or debts that are incurred by the business. A sole proprietorship business has a number of advantages. The first one is that it is relatively easy to start as it requires small capital and does not have registration requirements. Secondly, the owner has total control over the business thereby making it easy to decide on matters without mandatory consultations.

Additionally, the owner enjoys all the profits alone and does not need to file a separate tax return for the business, and all business costs are entirely deductible from the proprietor’s income tax (U.S. Small Business Administration, 2019). On the converse side, a sole proprietorship business usually finds it challenging to raise capital and also lack the benefit of sharing ideas to generate a better solution as there is only one person on board. The type of business cannot deal directly with government agencies, some enterprises and consulting groups as it lacks some level of legitimacy and professionalism (Teece, 2018). The other major disadvantage of a sole proprietorship is that in case the business attracts any liability in the course of its operations, the owner is personally liable to the extent that their assets can be used to settle the matter.

A business partnership is a particular type of legal relationship between two or more business partners to do business as co-owners with defined roles. There are two types of alliances namely; limited partnership and limited liability partnership (Cooper et al., 2016)

. In a limited company, one general partner has unlimited liability while all the rest have limited liability. The only significant difference between a limited partnership and a limited liability partnership is that in the later all partners enjoy limited liability. To form an organisation, the two or more individuals involved in the business (usually referred to as partners) must make a partnership agreement which is a document defining each partner’s roles and responsibilities, the relationship between partners, their respective share regarding profits or losses resulting from the partnership. The partnership must then be registered before commencing business and depending on your state, and one might have the latitude of choosing from the aforementioned types. The general partner is exposed to unlimited liabilities except in structured system such as the limited liability partnership where each partner has limited liability and is not liable for other partner’s actions (U.S. Small Business Administration, 2019). All partners file personal tax returns, but the general partner additionally pays self-employment tax. Among the advantages of partnerships are pooling of resources together thereby easing the burden of raising capital. Businesses also provide for structured consultations leading to better decision making.

Furthermore, the limited liability partners are legally protected on what extent they have to intercede in the event of business challenges. However, mandatory consultations may consume considerable time leading to a slow decision-making process. Another disadvantage of partnerships is that all profits must be shared unlike in sole proprietorship. Finally, the general partner does not enjoy limited liabilities.

A significant percentage of people believe that it is complicated to form a limited liability company. However, it is relatively simple and only requires a few mandatory steps to start. The first step is choosing a suitable business name in line with the state’s regulations. The second is filing the required formal paperwork that is the article of organisation and payment of the filing fee. The next step is creating an LLC agreement of operation which clearly outlines in detail each member’s rights and responsibilities. Then the members have to publish their intent of forming an LLC; however, this is not mandatory in all states. Finally, the company has to obtain the necessary licenses as well as permits that are required for their specific kind of business. An LLC is considered as an independent entity and therefore has to pay self-employment tax and corporate tax (Teece, 2018).

Additionally, the company has to make contributions to Social Security and Medicare. Owners of an LLC are not personally liable for the liabilities of the business. Although not all activities are at a point when forming an LLC makes perfect sense, t is imperative to note that an LLC comparatively has more advantages than partnerships or sole proprietorships (Cooper et al., 2016). The limited liability companies have limited personal liability, relatively less paperwork and also enjoy many tax advantages. LLCs equally have flexible management, ownership and profit distribution. On their disadvantages, LLCs require massive capital to start and maintain its operations. LLC requires the owners to keep personal records separate from those of the company and the company’s cheques cannot be cashed and must be deposited into a corporate account.

A corporation is formed and owned by one or more individuals (shareholders) who are not personally liable for the organisation's liabilities, and the business is usually responsible for paying corporate tax (U.S. Small Business Administration, 2019). To form a corporation, the owners have to choose a corporate name which should be unique to avoid trademark problems and an address. The following steps are selecting the state in which to incorporate the firm as well as the type of corporation. The following step is the determination of the company’s directors and their respective positions and roles which must be recorded in the article of incorporation and the related by-laws. Following the above steps settle for the type of shares you wish to use in raising capital. The next step is obtaining a certificate of incorporation and processing and filing incorporation preferable with a registered agent. Numerous benefits are associated with a corporation. One is a limited liability as the shareholders can only be liable up to their investment in the specific business. Second, the shareholders potential to raise capital is almost limitless. The third point is that ownership is flexible and one can easily transfer shares unless the corporation is privately-held. According to Teece, the fourth point attracts a lot of interest as it revolves on the longevity of the investment (2018). Corporations have perpetual lives, and ownership can be transferred through many generations. In the event of a corporation being registered as an S corporation, profits and losses will be directly passed to the shareholders without paying income tax. The disadvantages include double taxation, depending on the type of corporation, excessive tax fillings and an independent that takes away the shareholders ability to provide real oversight. Following the comparison of the above business structures and both their advantages and disadvantages, I would prioritise forming a corporation due to its numerous benefits.

 

References

Cooper, M., McClelland, J., Pearce, J., Prisinzano, R., Sullivan, J., Yagan, D. Zidar, O and Zwick, E. (2016). Business in the United States: Who Owns It, and How Much Tax Do They Pay? Tax Policy and the Economy 30(1), 91-128. doi.org/10.1086/685594

Teece, J.T. (2018). Business Models and Dynamic Capabilities. Long Range Planning 51(9), 44-49. doi.org/10.1016/j.lrp.2017.06.007

U.S. Small Business Administration. (2019). Choose a business structure. Retrieved from https://www.sba.gov/business-guide/launch-your-business/choose-business-structure

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