ESSAY Choosing My Business Structure

ESSAY Choosing My Business Structure

Business structures are the established legal structures of a business or an organization that are acceptable and recognized within a given jurisdiction (SBA, 2021). The business structures govern the formation, ownership, and operation of the business. For instance, business structures determine ownership of the business, tax compliance, stakeholders’ action, and the decision-making process (Rogers, 2012). The most recognized business structures in the United States include the corporation, limited liability company, partnership, and sole proprietorship. The small business administrative website provides the legal business structure in the united states. Therefore, this paper focuses on the various business structures that one would choose when operating in the United States.

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If I were to start a business in the United States, the business entity structure that I would choose is the Limited liability company (LLC).  According to Nolo (2020), many new startups are structured as limited liability companies (LLCs) and offers vital advantages to other business entities. For instance, the LLC blends the positive attributes associated with the corporation, partnership, and sole proprietorship. Although the state laws governing the LLC may vary, it offers critical advantages for a new business. In the United States, most states recognize the single members as the LLC owner; this means that one can be the sole owner of your business (Nolo, 2020). as the single owner of the LLC. One can make their own decisions without consulting or receiving approval from the partners, as seen in the general partnership or the board of directors. 

Another reason why I will prefer an LLC is due to the limited personal liabilities it offers to the owners. An LLC is a legal entity that has separate liabilities from the owner (Nolo, 2020). This means that the LLC owner is not liable for the legal and debt liabilities of the company. The LLC will help me to avoid double taxation. This is because the LLC receives a “pass-through” that allows the allocation of profits to be taxed only once for each member’s individual income tax return (Rogers, 2012). Other advantages of LLC business structures include fewer hassles and paperwork in the administrative, enhancing flexibility in profit sharing. 

Explain The Following Business Structure

Sole Proprietorship

Steps to form 

It is believed that a sole proprietorship is the most common and the easiest structure chosen to start a business. It is an unincorporated business owned and operated by one person, and there is no distinction between the person and the business. the steps involved in forming a sole proprietorship include:

• Creating a desired and unique business name.
• Deciding the location of the business.
• File for a business license within the city or county.
• Setting up the business checking account.  

Personal liability to owners 

Since the business and the person are considered to be ono, the business owner shoulders the liabilities. This implies that the sole proprietorship has unlimited liabilities (SBA, 2021). As such, there is no legal distinction between the business and the owner. Therefore, the creditor can reach out to the business and the personal assets of the owner. 

Taxation 

Since the business and the owner are one of the same, the business is not taxed separately. In this case, the sole proprietor’s income is your income (SBA, 2021). Therefore, the sole proprietor must report all the business income and losses to their income tax return; thus, the business is not taxed separately. Thus, the business profit is taxed through the personal tax return.

Advantages and Disadvantages 

The advantages of a sole proprietorship include less paper in the formation. It has an easier tax setup, fewer business fees, and a simplified business setup. However, it has some disadvantages, including unlimited liabilities (SBA, 2021). It does not have liability protection. It is hard to get business financing, and it is challenging to sell the business. Raising the business capital is challenging, and business continuity is not guaranteed since it ends with the owner. 

Partnership

Transformational Leadership Analysis

Steps to form 

The first step involves choosing the business name for the partnership and checking for availability. The second step is registering the business name with the local, state, and federal authorities. The third step involves negotiating and executing the partnership agreement. This step is a legal requirement, and the partners should execute a formal agreement (Dmlp.org, 2019). The fourth step involves obtaining the required local licenses. This is followed by the determination of the tax obligation of the partners through registering the Employer Identification Number from the IRS. Finally, open a bank account for your business. 

Personal liability to owners 

In the general partnership, the partners have unlimited liabilities. In this case, the partnership rule dictates that whatever debts are incurred in the business, there is a legal responsibility for the partners to pay them (Dmlp.org, 2019). 

Taxation 

The law requires the partnership to file annual information regarding their return to report their income, losses, gains, and deductions regarding their operations; however, they do not pay an income tax (Dmlp.org, 2019). Therefore, the partnership is not subjected to the federal income tax, and similar to the sole proprietorship, they are pass-through entities. Thus, the partners are taxed upon the shares of their income from the partnership. 

Advantages and Disadvantages 

A partnership has less paperwork and few legal liabilities; it is easy to establish since few legal fees are required, the partners share the burden of running the profit. There is better decision-making through shared responsibilities among the partners, and the partners’ affairs can be kept confidential (Dmlp.org, 2019). It is easy to raise capital, and ownership and control are combined. However, the disadvantages include the business’s lack of independent legal status; there are unlimited legal liabilities, limited access to capital, suffers from potential differences and conflicts, slow decision making, and limited business development (Dmlp.org, 2019).  

LLC

Steps to form 

The following are steps involved in forming the LLC: 

The first step is choosing the name for the LLC, secondly is the reservation of the name. This is followed by selecting a statutory agent who agrees to receive lawsuits and official documents on behalf of the LLC (Nolo, 2020). The fourth step is preparing the LLC operating agreement that describes how the company will be run, files the paperwork with the state, obtain a certificate from the state, and then register to do business in other states, which is optional. 

Personal liability to owners 

The LLC has limited liabilities since it a legal entity that is separate from the owners. Therefore, LLC owners are not liable for the LLC’s legal liabilities and debts. 

Taxation 

LLC receives a “pass-through entity” treatment that allows allocation of profit that is only taxed once on each member’s individual income tax return (Nolo, 2020). This helps LLC to avoid double taxation. 

Advantages and Disadvantages 

LLC advantages include fewer corporate formalities. There are no ownership restrictions; they have the advantage of using cash method accounting, it offers limited liability to the owners, it avoids double taxation of shareholders (Nolo, 2020). The disadvantages include; it has a higher cost of operation, the profits are subjected to social security and medical taxes (Nolo, 2020). 

Corporation

Steps to form 

Steps involved in the formation of the corporation include: 

Choosing the business name, checking the availability of the name, registering a DBA name; applies when one chooses to operate the business in a different corporate name from the one selected (Legalzoom, 2020). This is followed by the appointment of the directors, filing the articles of incorporation, writing the corporate by-laws, drafting the shareholder’s agreement, holding the initial board of directors meeting, issuing the stock, obtaining the business permit and licenses (Rogers, 2012). The corporate must also register with the IRS and state local tax agencies and finally open a corporate bank account.

Personal liability to owners 

Corporations have limited liabilities to owners since the business is a different legal entity separate from the owners. As such, the corporate is responsible for its debts. 

Taxation 

The united states taxes corporation on their profits at the rate of 21% (Legalzoom, 2020). 

Advantages and Disadvantages 

The advantages of a corporation include; the protection of personal liability, it ensures business security and continuity, it is easier to access capital (Legalzoom, 2020). However, there are disadvantages; namely, they are time-consuming to operate and run, are subjected to double taxation, rigid protocols, and formalities that reduce management efficiency.

Conclusion

The type of business structure adopted by a business player goes a long way in determining the ease with which the business is formed and the level of engagement with stakeholders. While some structures are easy to form as they don’t need stringent legal processes, others may take longer to establish. This task has provided an in-depth analysis of the different business structures, how they are formed, the probable liabilities and advantages and disadvantages that come with each business structure. From the evaluation, it is up to the business player to critically analyze the most feasible structure after a consideration of the ease/complexity of formation, the legal processes and advantages and disadvantages.

ESSAY Choosing My Business Structure