Three types of business structures exist; Partnership, Sole Proprietorship, and Corporation. Essential deliberations are dimensions of the commercial, the method in which revenue from the trade is a tax, the lawful obligation of the proprietors, and the capability to obtain monies to fund the business. Few businesses start-up as a large capacity organization. All business structures have advantages and disadvantages; these differences can help with the determination of the company course. Many do not have the same desires when it comes to opening a business, therefore, one must be aware of the advantages and disadvantages of each structure.
This gives those looking toward creating an organization the tools to make an informed and appropriate decision. Choosing a sole proprietorship or running a massive corporation requires knowing the advantages and disadvantages of the structures. Sole Proprietorship Advantages of a sole proprietorship is the independence of owning one’s business. He or she has no one to split profits with or decision-making to compromise. The owner has full reign over company resources.
According to Parrino, Kidwell, and Bates (2012), 75 percent of all trades in the United States are sole proprietorships, usually involving a proprietor with few employees (p. 6). Sole Proprietorship is the simplest form of company to start with the least amount of regulation. The largest advantage is the company is subjective “to lower income taxes than the most common type of corporations” (Parrino, Kidwell, & Bates, 2012, p. 6). Disadvantages entail the debt and costs of the organization.
Because the organization is owned by only one, he or she holds full responsibility for paying all debts occurred by the sole proprietor with unlimited liability. This allows creditors to collect debts from the business and personal assets. The personal wealth of the owner is not limited when in investing in the equity BUSINESS STRUCTURES 3 capital because this may restrict growth possibilities. Transferring ownership of a sole proprietorship may be difficult since no stock or interest is involved in the sale (Parrino, Kidwell, & Bates, 2012, p. 6). Partnership Partnerships consist of two or more proprietors who come together officially to achieve a professional partnership.
The responsibility is a shared management toward the organization’s best interest. No requirement of filing income as a business entity exists. This places the responsibility of each partner to report their shares of business profits and losses on their personal income tax return. The two kinds of partnerships are general and limited. General partners are liable for the full extent of debts and obligations within the business. Limited partnerships provide individuals with a limitation of responsibilities in the organization’s liability; this type of connection is dependent upon the investment percentage (“U.S. Small Business Administration,” 2013).
Advantages of partnerships consist of shared financial responsibility, cost efficiency, offer employees partnership incentives, and complementary skill association. Disadvantages of partnerships are joint and individual liability, disagreements between partners and shared profits. A creditor may pursuit partner’s personal assets as recompense for the business obligation (“U. S. Small Business Administration,” 2013). Corporations Corporations are a legitimate entity accredited under a State certificate.
Corporations can be sued, enter into agreements, borrow money, own assets, and issue debt. Corporations provide shareholders, directors and officers limited liability protection for company obligations. A shareholder’s responsibilities for business obligations does not go outside their security in the BUSINESS STRUCTURES 4 company. In addition, a corporation can increase capital by distributing bonds and stocks. All the proceeds from a bond or shares issuance are company revenues.
The disadvantage is dual taxation (Parrino, Kidwell, & Bates, 2012, p7). A corporation must file a business tax return with the Internal Revenue Service and pay taxes on company profits at the company’s applicable corporate tax rate. Later, when the company distributes dividends to its shareholders, the shareholders must pay taxes on dividends received from the business at their personal income tax rates (Parrino, Kidwell, & Bates, 2012, p7). “Starting a corporation is more costly than starting a sole proprietorship or partnership” (Parrino, Kidwell, & Bates, 2012, p7). Furthermore, a corporation can be more costly to continue to operate. Conclusion The dynamics of each style of business structures are applicable to the organization.
Although the structures represent various disadvantages and advantages, the organization must be chosen established upon product or needs of the company. Each structure should benefit the style that works best for the organization. BUSINESS STRUCTURES 5 Reference Parrino, R. , Kidwell, D. S. , & Bates, T. W. (2012). Fundamentals of Corporate Finance (2nd ed. ). Retrieved from The University of Phoenix eBook Collection database. U. S. Small Business Administration. (2013). Sole Proprietorship. Retrieved from the http://www. sba. gov/content/sole-proprietorship-0 University of Phoenix. (2013).