Business Organization
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Business Organization
Critical analysis of business structures is crucial when starting a business. Besides determining day-to-day operations, a business structure determines personal assets risks, and tax obligations. Consequently, individuals should select an appropriate form of business that accomplishes their investment objectives (Nandini, 2022). Business structures have defined formation strategies, tax mandates, advantages, and disadvantages. Selecting an appropriate business structure affects future changeover plans such as unintended dissolution and tax consequences. My preferred business structure is a limited liability company (LLC) due to flexible management, tax obligation, and liability scores. Since different business structures have specific characteristics, the paper analyzes different types of business organizations.
Sole Proprietorship
A sole proprietorship is a business enterprise owned by one person. The owner controls the business by making day-to-day management decisions (U.S. Small Business Administration (SBA), 2022). A sole proprietorship is easy to form as it entails opening a business enterprise with a trading name after getting an operation license. The business has unlimited personal liability as the owner’s assets are not separate from the business liabilities (Nandini, 2022). The government receives personal tax and employment tax from a sole proprietorship. A sole proprietorship is easy to control as the owner determines spending habits (SBA, 2022). The start-up costs for a sole proprietorship are low compared to other forms of business. Decision-making processes are also quick for sole proprietorship as the owner make unilateral verdicts. The business enjoys high secrecy since it does not submit annual financial reports (Nandini, 2022). Sole proprietorship supports the personal touch between the owner and the clients due to direct interactions.
Sole proprietorship demerits compromise its effectiveness. Firstly, the business has unlimited liability (SBA, 2022). The owner is liable for business obligations and may lose personal assets to settle business debts. Secondly, it is difficult to raise funds for sole proprietorship as investors prefer corporations as they are financially secure (SBA, 2022). Financial institutions such as banks prefer issuing loans to other established forms of businesses compared to a sole proprietorship. Thirdly, a sole proprietorship has life uncertainty since operations depend on the proprietor’s health status (Nandini, 2022). Limited specialization and skills are additional disadvantages of a sole proprietorship. Business termination is inevitable if the owner becomes incapacitated or dies.
Partnership
A partnership is a business organization owned by two or more individuals. A partnership can either be a limited liability partnership (LLP) or a limited partnership (LP). The limited partnership involves partners with limited liability and a general partner who enjoys unlimited liability (Nandini, 2022). Consequently, the general partner controls business operations. The general partner pays self-employment taxes and each partner remits personal tax from the business proceeds. On the other hand, in an LLP, all partners have limited liability. Individuals form partnerships by signing a legal document called a partnership deed which declares the terms of operations (SBA, 2022). The document provides guidelines to resolve conflicts that emerge during business operations.
Partnerships have merits and demerits as is the case with other forms of business organizations. The main advantage of a partnership is the ease of formation as it requires minimal legal documents and paper paperwork to launch (SBA, 2022). Secondly, partnerships enjoy larger financial resources compared to sole proprietorships, thus, they have a wider scope for expansion. Likewise, better management is another advantage of partnership as each partner contributes his or her skillset (Nandini, 2022). The workload is also distributed in a partnership as partners share responsibilities. A partnership’s capacity for survival is higher compared to a sole proprietorship as the death of a partner hardly renders the business insolvent. The main demerit of partnership is the possibility of disagreements as partners may have dissenting views in terms of day-to-day operations and business decisions (SBA, 2022). In addition, transferring business ownership is difficult due to partnership deed clauses. LLP has unlimited personal liability as partners’ assets are seized to settle business-related arrears.
Limited Liability Company (LLC)
LLC is a form of business organization that is owned by one or more persons. LLC is a hybrid of a partnership and a corporation’s business structure (SBA, 2022). Unlike a partnership and a sole proprietorship, LLC has unlimited liability as the owner’s assets are safe in the event the company encounters lawsuits or bankruptcy. Even though LLC corporate tax rates are lower than those of a corporation, owners pay self-employment taxes while the business remits corporate tax (SBA, 2022). State regulations limit LLCs’ lifespans, for instance, some states require re-formed membership commitments whenever a member joins an LLC. Therefore, LLC documentation declares ownership transfer, selling, and buying protocols.
LLC has advantages and disadvantages just like other types of business organizations. The business has limited liability compared to a partnership or sole proprietorship (Nandini, 2022). Consequently, business debts hardly consume the owner’s assets. LLC business operations are flexible as the owners can agree to change management strategies whenever they like. Pass-through taxation is another advantage of LLCs since owners can opt to pay personal taxes and avoid corporation taxes (SBA, 2022). However, LLC start-up costs are higher compared to a partnership or sole proprietorship (Nandini, 2022). The business also incurs higher annual fees once its operations commence. Limited funding is another disadvantage of LLC since it is restricted from receiving public funds. LLC exit strategy is complicated as it entails legal formalities and liquidation expenditures. Therefore, LLC pacts are complex, comprehensive, and involve higher costs.
Corporation
A corporation is a business structure that can be initiated by one or more persons. The first type is C corp which encompasses a business entity that has separate legal protection from the owners (SBA, 2022). C corp encounters double-taxation as it pays corporate taxes and owners remit income tax on profits. S corp is another type of corporation and is formed by one or more persons who are United States citizens (Nandini, 2022). Unlike C corp, S corp does not incur double taxation as shareholders only remit personal income tax to the federal government. B Corp is the third type of corporation recognized as a for-profit corporation in the U.S. (SBA, 2022). B corp remits corporate tax and publishes annual reports that show their impacts on the public. A nonprofit corporation encompasses a business entity that engages in scientific work, religious, education, or charity activities. They do not pay corporate tax or income tax on profits realized to the federal government.
Corporation’s merits and demerits distinguish it from other business structures. The shareholders have an independent life from the business as operations proceed even if a shareholder sells shares or dies. Likewise, corporation shareholders are not liable for business debts, instead, the business utilizes their equity to settle arrears (SBA, 2022). The corporation exhibits a wider expansion scope as it raises additional capital to increase stocks by selling shares. In addition, ownership can be transferred to shareholders easily compared to other forms of business. However, the double taxation policy that applies to C corp increases operational costs (Nandini, 2022). Shareholders remit income tax at the corporate level and personal tax on business proceeds realized during operations. Managing a corporation is tedious as it entails complex paperwork such as publishing annual reports. Since investors are not directly involved in day-to-day management activities, the administrative team may opt to manipulate business operations to fulfill their financial interests. Therefore, it is costly to start and run a corporation.
Overall, I prefer starting a limited liability company as an investor. The business structure is secure since my assets cannot be seized to settle business debts. LLC management is flexible as it incorporates administrative protocols of a partnership and a corporation. Besides operational flexibility, an LLC is tax-efficient compared to a corporation. Centralized management approach and continuity of life are additional factors that inspire me to run an LLC. Since a business structure determines taxation mandates, ownership, and liability scores, individuals should research to establish the appropriate business organization that suits their development goals.
References
Nandini, G. (2022). Forms of Business Organization. https://www.economicsdiscussion.net/organisation/forms-of-business-organisation/31599
U.S. Small Business Administration. (2022). Choose a Business Structure. https://www.sba.gov/business-guide/launch-your-business/choose-business-structure