Introduction
Starting a new business requires making several crucial decisions influencing the company’s future, including the structure of the venture. The Internal Revenue Service (IRS) (2022) highlights five common types – sole proprietorship, partnership, limited liability company (LLC), corporation, and S corporation. Each of them has its characteristics affecting the issues of liability, taxation, and ownership. Despite the advantages of various types of structure, the choice for “Tru Royalty Travel” is the LLC format, as it combines the best characteristics of sole proprietorship and corporations.
A Business Formation Type for “Tru Royalty Travel”
“Tru Royalty Travel” is a tourist company that provides for the needs of its customers in various aspects of travel. LLC is a structure implying limited liability specific to corporations and taxation characteristic of partnerships or sole proprietorship (Mancuso, 2021). Limited liability separates the personal and business assets of the company’s owners, protecting personal ones in case of risk (Lee & Cho, 2020). At the same time, the enterprise is not a separate taxable entity – the company’s profit goes to the owners, who are protected from corporate taxes (Mancuso, 2021). LLC’s advantages justify its choice as a structure for “Tru Royalty Travel.”
In addition to limited liability and the peculiarities of taxation, several other factors influenced the choice of LLC for the travel company. Its formation is possible with a different number of owners, even one (Mancuso, 2021). Moreover, the LLC is characterized by flexibility in managing ventures and distributing profits and losses (Mancuso, 2021). Unlike corporations with formal management structures, owners are free to run the enterprise or assign employees to such tasks. This structure is suitable for various medium- and high-risk enterprises (U.S. Small Business Administration (SBA), n.d.). LLC is a convenient choice for a new small business with a limited number of owners, such as “Tru Royalty Travel.”
All identified business formation types have distinctive features, and the key differences are in matters of responsibility and taxation. For example, with sole proprietorship and partnership, the venture has an unlimited personal liability, and in other forms, owners are not personally liable (SBA, n.d.). The exception is the type of partnership – limited partnership, where liability is also limited (SBA, n.d.). In tax issues, sole proprietorship, partnership, and LLC owners pay personal and self-employment taxes (SBA, n.d.). Corporations pay corporate taxes, and S corporations pay personal taxes (SBA, n.d.). Finally, the ownership of the enterprise in sole proprietorship belongs to one person, in partnership – two or more, and in other forms – one or more. Before deciding on the structure of the venture, owners should consider these differences and choose the most convenient option.
Differences in business formats affect the benefits they give their owners. Sole proprietorship gives complete control of the venture, and all profits belong to the owner (Lee & Cho, 2020). However, attracting financing to such a company is more complicated, and personal and business assets are not separated. The partnership is convenient for a group of specialists who start their business. Such ventures are also easily formed but can attract more investment for development than a sole proprietorship. The critical advantage of corporations is raising financing, mainly through the sale of shares (SBA, n.d.). Their activities continue even if the shareholder leaves the company. However, they have a high creation cost and are difficult to manage. Such features of formations can also affect the decision of the owner to choose a structure.
Conclusion
Thus, choosing the structure of the business is one of the decisions that the owner makes when founding the company. The five common business formation types are distinguished by taxes, which are paid by the owners, and their liability. For “Tru Royalty Travel,” LLC is the right choice, as it combines all the best characteristics of various formats in matters of taxation and liability and is suitable for a new business. At the same time, each of the types has its advantages, and it is crucial for owners to consider them before making a decision.
References
Lee, B., & Cho, Y. (2020). The legal structure of ventures and exit routes: A study of single-founder start-ups in the United States. The International Journal of Entrepreneurship and Innovation, 21(4), 211-222. Web.
Mancuso, A. (2021). Form your own limited liability company: Create an LLC in any state (12th ed.). Nolo.
The Internal Revenue Service. (2022). Business structures. Web.
U.S. Small Business Administration. (n.d.). Choose a business structure. SBA. Web.