Before starting any business, the first and most important issue would be the choice of the form of ownership since the state requires mandatory registration for entrepreneurs. It is necessary for the state to closely monitor those who are registered and make sure they pay taxes. As for my business, I would choose LLC; however, before explaining all advantages and disadvantages, it would be important to discuss some forms of it.
A sole proprietorship can be considered as the easiest type since it provides more freedom and less tax. The most obvious benefit is that the entrepreneurs withdraw and spend personal income immediately according to their wants. However, this feature also provides the drawback when the owner is liable for obligations with all his property, even in the case where the entrepreneur closes the business. In other words, a sole proprietorship does not have limited liability protection; therefore, if someone sues that individual, the assets would also be at risk (Maraj, 2020). As a result, the obligations of the individual businessman after the termination of activities do not disappear anywhere. For this reason, this type of ownership would not be suitable for me as along with the freedom it offers many risks.
Nevertheless, there is a number of different entities, where funds are separate from an individual and acompany. For instance, an LLC is neither a partnership nor a corporation, but a distinct type of business structure that offers an alternative to traditional organizations. It combines the corporate benefits of limited liability with the advantages of pass-through taxation, which are typically associated with partnerships. There are two main types of LLC, which are one-member and multi-member (Maraj, 2020). An LLC that is controlled by more than one person is called a multi-member LLC. By default, a one-member LLC is taxed as a sole proprietorship, and a multiple-member LLC is taxed as a partnership. There are also several disadvantages, for example, the limited ability to transfer ownership. Furthermore, the transfer of company shares to third parties is possible only with the consent of all other company participants. If one of the members of the company leaves the business, the continuation of the LLC’s activities is possible only with the consent of the remaining members.
As LLCs are legally considered as distinct entities, the personal assets of each owner, such as a home, car, or personal bank account, are not available to business lenders. The liability of an LLC member is generally limited to the amount of money the person has invested in the company. As a result, the members are offered the same limited liability protection as corporate shareholders. As with general partnerships, LLCs are free to establish any organizational structure agreed by the participants. This gives owners maximum flexibility to separate or combine the interests of the investors in the company. As a registered LLC, the business is considered legitimate and has more trust from other companies, banks, and potential partners or investors than, for example, an individual entrepreneur. The reason for this is that an LLC is recognized as an authentic company.
The last form of business is called a corporation; they are usually the biggest international companies. Their activities are strictly defined by the agreed regulations, and the shareholders of the corporation have limited liability for all risks and debts of the corporation. Moreover, these owners can receive additional benefits, such as health insurance and partial payment of taxes on their wages. It would be difficult to create such an enterprise at the start; therefore, this type is not fit for me.
An LLC, however, seems to be the most appropriate because it has many benefits that cannot be used in any other business. For example, apart from combining the best opportunities of proprietorships and corporations, LLCs avoid the major disadvantages of both sole proprietorships and corporations. Limited liability companies are much more flexible and require less paperwork than corporations to maintain while avoiding the personal liability risks that come with proprietorships.
Reference
Maraj, M. (2020) Sole proprietor vs. LLC vs. S corporation vs. C corporation | Legal & tax differences [Video]. Web.