Introduction
The selection of a business structure is a critical milestone in the creation and development of a firm. This step will determine the responsibilities of entrepreneurs, financial reporting practices, and the ways of raising capital. This paper will discuss the main peculiarities of different business entities. Much attention will also be paid to the positive aspects of a limited liability company (LLC). Overall, before choosing a business structure, entrepreneurs should take into account various issues, including existing risks, available financial resources, the number of owners, and other variables affecting the company.
LLC and Its Major Strengths
A person who intends to start a business may choose among different organizational forms; however, an LLC appears to be the most suitable option. This entity has several important advantages that can be of great use to an entrepreneur. Firstly, it affords protection from individual liability, which means that the personal assets of the owner cannot be seized if an LLC goes bankrupt or sustains significant financial losses (Rogers & Kauffman, 2012).
Moreover, in this case, the owner will be exempt from corporate taxes; from a legal standpoint, he/she will be viewed as a self-employed individual (Rogers & Kauffman, 2012). Unlike corporations, LLCs allow shareholders to exercise greater control over business decisions. On the whole, this organizational type helps a person avoid many risks without facing various bureaucratic difficulties.
The Discussion of Different Business Structures
Sole Proprietorship
A sole proprietorship can be regarded as the simplest organizational form since, in this case, only one owner is involved. The legal requirements for starting this type of enterprise may not be the same in different jurisdictions. However, the person is usually expected to obtain occupancy and business licenses (Steingold, 2017). Providing that the business will be operated at home, the entrepreneur should also receive permission (Steingold, 2017).
Moreover, it is necessary to register the organization with the taxing authority and choose a business name. One should mention that a person, who opens a sole proprietorship, assumes full personal liability for the debts incurred by the firm (Rogers & Kauffman, 2012). If this business structure is chosen, the owner will pay only personal tax. Among the advantages of sole proprietorships, one can distinguish between reduced paperwork, lower taxes, and complete control over business decisions. Nevertheless, there are certain shortcomings, namely, complete personal liability and limited opportunities for attracting new capital.
Partnership
A partnership is the association of several individuals who intend to do business together. To set up this type of organization, one should take several steps. Firstly, it is vital to draft and sign a partnership agreement. This contract will describe the responsibility of every party and profit distribution (Steingold, 2017). Additionally, the owners will need to specify the name of their partnership and acquire a business license (Steingold, 2017). It will also be necessary to open a bank account for the company. One should note that people, who establish a partnership, assume full liability for the debts and malpractices of their enterprise; thus, their personal assets can be seized by creditors. These individuals will have to pay self-employment tax and personal tax.
While discussing the strengths and weaknesses of this business structure, one should focus on such aspects as the process of formation and responsibilities of partners. This business structure is rather easy to form; there are few bureaucratic requirements that the owners have to meet (Rogers & Kauffman, 2012). The main downside is that a person bears complete responsibility even for the actions of his/her partner. For instance, if one of them makes a mistake leading to losses and debts, the other partner will also be liable for these debts (Rogers & Kauffman, 2012). Hence, it will be better to buy insurance before establishing a partnership.
LLC
The creation of an LLC involves several steps needed for receiving the permission of governmental officials. At first, the owners of this enterprise should file the articles of the organization (Cunningham, Proctor, & Nelson, 2016). This document is supposed to include such elements as the name of the company, its organizers, managers, and so forth. Furthermore, one will have to sign the operating agreement specifying the rules according to which the organization will function (Cunningham et al., 2016).
For example, it determines the distribution of profits, the responsibilities of each member, financial reporting practices, and many other aspects. Moreover, in some cases, the founders of an LLC should receive various licenses required for starting a business. The members of an LLC are free from personal liability; thus, their individual assets cannot be taken away by creditors and governmental officials (Rogers & Kauffman, 2012). Furthermore, these people will be expected to pay self-employment and personal income tax.
The main advantage of an LLC is that this organizational type enables owners to reduce potential risks arising in case of significant financial losses, malpractices, and debts. The entrepreneur can only lose the assets of the organization, but not his/her personal belongings (Rogers & Kauffman, 2012). Nevertheless, there are some downsides of this structure; in particular, much attention should be given to the increased costs of establishing the enterprise (Cunningham et al., 2012). They can be explained by the greater amount of paperwork. Additionally, these organizations are usually tightly regulated by the government; therefore, their owners have to meet higher financial reporting standards.
Corporation
Corporations may be established in different jurisdictions; however, the creation of this business entity usually consists of several stages. Firstly, entrepreneurs should identify the directors of the corporation. These people will be responsible for making the decisions that will shape the strategies of the organization. Furthermore, it is necessary to submit the articles of incorporation (Steingold, 2017).
This document will describe corporate statutes, profit distribution, and governance. This organization will also have to give stock certificates to the shareholders (Steingold, 2017). The main peculiarity of corporations is that their owners are not personally liable for the actions of the organization. They can only lose their investments, but not personal belongings. These individuals will also have to pay corporate tax.
Corporations have several advantages that make them very attractive to entrepreneurs. As it has been said before, this business structure implies only limited liability of shareholders; thus, their personal assets cannot be taken away by creditors and governmental institutions (Rogers & Kauffman, 2012). Secondly, unlike partnerships or LLCs, corporations do not have to be dissolved when new owners join these organizations (Rogers & Kauffman, 2012). Nevertheless, there are several shortcomings, including increased governmental oversight, the inability of many owners to control business decisions, and increased costs of establishing such business entities. These details should be considered by people who intend to create a corporation.
Conclusion
This discussion indicates that each business structure has certain strengths and weaknesses. Before choosing any specific organizational type, an entrepreneur should take into account various factors. For instance, it is possible to consider such issues as the risks incurred by the company, its need for capital, available financial resources, and so forth. In this way, owners can avoid unnecessary costs and reduce potential threats. Moreover, they will ensure that the creation of a business entity does not become very time-consuming.
References
Cunningham, J. M., Proctor, V. R., & Nelson, A. (2016). Drafting limited liability company operating agreements (4th ed.). New York, NY: Wolters Kluwer Law & Business.
Rogers, S., & Kauffman, K. (2012). Essentials of business law. San Diego, CA: Bridgepoint Education.
Steingold, F. S. (2017). Legal guide for starting & running a small business (15th ed.). New York, NY: Nolo.