The business structure that I will choose
Every individual who wants to start a business must first understand the business structure that will be appropriate for their business. A business structure defines the organization, operations and handling the issues of tax and liability in a business (Debbage & Bowen, 2018). Business people can choose different business structures depending on the type of business they want, and they include sole proprietorship, the partnership business, Limited Liability Company (LLC) and the corporation. The business structure determines the tax amount paid by the business, the capacity and ability to raise capital, requirements for business formation and personal liability. The business structures also have advantages and disadvantages thus can affect the general outcomes of the business.
If I were to start my business, I would choose a sole proprietorship business structure. It is a new business, and I am getting to explore every opportunity for improvement, I will be the one in control of all the operations in the business (Debbage & Bowen, 2018). I will be in charge of making strategic decisions for the business. I will also have the opportunity to test the business idea that I have as it does not require a lot of capital to start. I will also have sufficient time to grow my business and consider changing to another business structure depending on the revenues I will have accrued, the costs of doing business and potential risk of my business.
The Sole Proprietorship
It is a simple structure for a business owned by a single person. The owner independently controls business operations, and it is easy to form. The owner has to open a bank account with the business name, get the general liability insurance and pay taxes. The advantage of a sole proprietorship is that taxation is once due to the limited income of the owner (Debbage & Bowen, 2018). It is also an appropriate business structure for businesses with low initial capital requirements and low risks. However, the sole proprietorship has unlimited limited liability for the business debts, and it faces the risk of being declared bankrupt. In case, the owner wants to expand the business, and it is difficult to raise more money since most banks will not be willing to lend single business owners the money as they need to verify the creditworthiness of the business.
A partnership has two or more people who own the business. The partners need to choose the business name and file for a trade name then sign the partnership agreement. They also have to get the business, and employer identification number then start the business (Rogers, 2012). The partners equally contribute initial capital and labor for the business, and they also share the business profits and losses. The general partner handles the unlimited liability, and other partners handle the limited liability, and they have limited control of the business operations. They also file tax under the personal tax. However, the general partner files tax under the self-employment tax while. The advantage with partnership it is easy to create as long as the partners are in agreement and have a common goal to achieve. The tax is on each partner’s earnings and not the business. The disadvantage is that in case of business debts, partners risk being sued independently or collectively thus disrupts the business operations.
Limited Liability Company
It is the type of business structure that has both the characteristics of partnership and corporations. It is easy to form as it involves selection of the LLC name, filing the articles of organization, choosing operation agreement, publishing a notice, getting the license and getting the limited liability (Toson, 2018). The tax is on the member’s earnings and not the business. One or more people can own LLC, and the members are not personally liable to business debts (Rogers, 2012). The filing of taxes depends on how the members run the business and the tax can fall under the personal tax, self-employment tax, and corporate tax. It is also compulsory for members to list business profits and losses on individual’s returns on personal tax. LLC is suitable for medium businesses with high business risks. The business owners may choose this business structure to protect personal assets and to pay low tax rates (Toson, 2018). Members, therefore, have liability protection. However, the exit of one member ceases the existence of the LLC.
It is a complex and expensive business structure which is a legal entity that is independent of the business owners. There are more tax requirements and regulations involved before and after its formation. Members need to select the business name, draft the article incorporation, creating corporate bylaws, prepare the shareholders agreement, and to choose officers to carry out the business operations. The business owner has guaranteed liability protection of the business (Rogers, 2012). Personal assets are also not at risk, and the business owner has the opportunity to retain some profits without paying for tax on the benefits.
The corporations can raise money within a short time as they can sell their stocks to raise funds. If one shareholder leaves the corporation, there is still continuity of the business. However, the disadvantage with corporations is the high costs involved in the formation. Each state has its laws and regulations, and the business owners may require legal professional like the attorney for the guidance on the creation of business structure (Rogers, 2012). Corporation also needs more tax and accounting documentation and other compliance rules that other business structures. Another disadvantage is that the business owners pay double tax. They pay income tax at federal and state government, and the shareholder’s income also gets taxed under returns on personal income. The corporation is therefore not suitable for small and medium businesses.
Debbage, K. G., & Bowen, S. (2018). Non-farm proprietorship employment by US metropolitan area. Journal of Enterprising Communities: People and Places in the Global Economy, 12(2), 139-157.
Toson, S. J. (2018). Renewed hope for the low-profit limited liability company. Society and Business Review, 13(1), 100-111.