Case Study: Forms of Business

There are a number of alternatives to choose from when developing a business. Some of them include corporations, partnerships, limited liability companies, and your current business type, a sole proprietorship. There are also a number of advantages and disadvantages to each one. I’ll be presenting you with a number of the pros and cons of each business, in order to assist you with your decision.

Your current business is run as a sole proprietorship. This is a type of business entity which legally has no separate existence from its owner. This means that any debts of the business are also debts of the owner. From a liability standpoint this would be a disadvantage to having a sole proprietorship. An advantage would be that the owner also receives all profits. This form of business also has it’s tax advantages. Accounting and tax returns are a lot simpler. The owner is exempt from double taxation, therefore files a single personal tax form. A sole proprietor is also subject to the least amount of government regulations of all business entities.

When it comes to running this type of company, there are no legal formalities to forming or dissolving your business. However, sole proprietors tend to have a hard time raising capital. This is because there are no shareholders, other investors, or bank finance. The owner is also responsible for their own health insurance, which makes it hard to hire employees. Another disadvantage to the longevity of this type of entity, is that the life span is uncertain. With a sole proprietorship, when the owner dies, the business dies.

The owner of this type of entity has complete control. This makes for quicker decision making without having to consult others. However, this arrangement can cause hesitation amongst investors who may want some control or influence. Being subject to less government regulations is a convenience for owners. On the other hand hiring for this type of business can be difficult, which can place more of a workload on the owner.

Another option is to convert your business into a partnership. This is a type of business entity in which partners share the profits and the losses. This is a liability advantage when compared to a sole proprietorship. The owners have shared responsibility when it comes to debts incurred. However, all partners can be subject to financial liability due to another’s negligence. While liability is shared, should one partner be unable to pay, another may be subject to 100% liability.

When filing income taxes the partnership is exempt from double taxation. This means that the partnership itself pays no taxes. The partners claim their portion of income generated through the business as personal income tax. When in a partnership, partners owe a contractual and fiduciary duty to one another. A duty to act for the others benefit can be a plus in securing the longevity of a partnership. A good relationship amongst partners is key to longevity and continuance. Without trust and reliability, a partnership can go wrong. For instance, one partner may borrow money, or sign contracts on behalf of the partnership, without the others consent.

Partners have equal voting rights despite the amount of capital contributed. However, there are cases where what is called a “squeeze out” may occur. This is done by holding a vote, and the majority shareholders deciding to adequately compensate a minority, and dismiss them. When it comes to forming a partnership, it’s very easy and inexpensive to create and maintain. There are a number of administrative inconveniences such as state required renewal filings and fees.

Another business structure is the limited liability company, also known as LLC. This type of entity is similar to a corporation in some aspects, and a partnership in others. Owners or “members”, are protected from liability for acts or debts of the LLC. However, there are exceptions in which a member may be held personally liable. For personally and directly injuring someone, or guaranteeing a bank loan or business debt on which the LLC defaults. Also, should a person be found to have been intentionally fraudulent in a certain case, treats the LLC as an extension of his or her own personal affairs, or fails to deposit taxes withheld from employees.

When filing taxes there is less administrative work, and record keeping. The LLC is also exempt from double taxation, being subject to corporate and individual tax. Unless they elect to be taxed as a corporation. The LLC may choose to be taxed as an LLC,