Business Law – BUS311
Choosing a business structure is an important decision that should only be done after researching all options possible. There are a variety of business structures to choose from including, sole proprietorship, partnership, limited liability company or LLC, and corporations. If I were to start my own business the structure I chose would depend on the type of business I had. For this assignment let’s assume I was opening a life coach business, for this business I would start as a Sole Proprietorship and if all goes well switch to a Limited Liability Company if my company grew larger than a few people.
Sole proprietorship is a great place to test out a business model for success. The owner of a sole proprietorship (one man/woman business) has complete control of their business. Unlike an LLC or corporation there is no need to take any formal steps at the federal, state or local level. “As long as you are the only owner you automatically become a sole proprietorship by conducting business.” (Inc. Staff, 2010). It is recommended to establish a business name, open a separate bank account and register the business with the IRS if federal employer identification number (EIN) is needed, otherwise the business can operate under a social security number. Taxes will be filed separate from personal taxes. Since taxes are not taken from a paycheck to cover tax obligations, paying taxes is the owners possibility. The drawback of a sole proprietorship is the business entity is not separate from your personal assets. Any debts inquired by the business would be the owner’s responsibility and the debt collector could go after personal assets such as car or house. Because sole proprietorship businesses cannot sell stock it’s difficult to get a loan from the bank (sba.gov). Overall a sole proprietorship is low risk and a good option for a self-employed business.
A partnership is the simplest business structure for two people. There are two types of partnerships, limited partnership (LP) and limited liability partnership (LLP). The only difference is the weight of liability on each person. Partnership has equal rights regardless of how much investment each has contributed unless specified. Forming a partnership is simple and consists of agreeing to work as co-owners with the goal of turning a profit. Each person will be taxed on their earnings only. Although a partnership isn’t required to be in writing, it would be a good idea. The downside is both parties holds equal liability. If the company were to be sued, both parties would be held responsbily including personal assets.
Limited Liability Company (LLC)
According to “Choose a business structure”, “An LLC lets you take advantage of the benefits of both the corporation and partnership business structures.” (n.d.). An LLC protects your personal assets from being taken in the case of debt collection. Income can be moved to personal accounts without paying corporate taxes but Medicare and Social Security must still be paid (“Choose a business structure”, n.d). Setting up an LLC is pretty simple and it all starts with a name. Once a name has been chosen Article of organization must be filed with the State and there is usually a fee associated with the filing. Next all members need to agree and create an LLC Operating agreement which spells out the percentage of interest in the business by each person, voting power, how P&L will be managed, meeting rules, etc. Finally, any licenses and permits required by the state should be in place before doors are open. (Laurence, 2018). Just like a partnership, profit and losses are passed through to the LLC members personal taxes. An LLC takes the best options from a partnership and company and put them together. The disadvantages of an LLC are that it is newer and all the kinks have not been worked out.
A corporation is a legal entity, kind of like an artificial person. It’s separated from the people who own or manage it but has the same rights as a real person including owning property and constitutional rights. Since a corporation is its own entity the liability to the stakeholder’s personal assets does not exist. Corporations live well past the stakeholders if the company is run well. If a stakeholder would like to leave the company it will not dissolve like other business structures. The company and the stakeholders are taxed which is definitely a disadvantage. There is also a lengthy and complicated filing process to become a company. Anaul reports must be filed and a registration fee must be paid.
In conclusion, there are many options to choose from when deciding on a business structure. The options fit all sizes, shapes and needs of businesses. Researching what is needed for each should be one of the first steps taken when choosing the best fit for the business while considering the possible future of the business.
Inc. Staff, (2010). Inc.com – How to Start a Sole Proprietorship. Retrieved from https://www.inc.com/guides/2010/10/how-to-start-a-sole-proprietorship.html
Laurence, B. (2018). How to Form an LLC. Retrieved from https://www.nolo.com/legal-encyclopedia/form-llc-how-to-organize-llc-30287.html
U.S. Small Business Administration – Choose a business structure. Retrieved from https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
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BUS311 Week 4 Assignment - Business Structure.docx