When determining the optimal business structure, several factors must be taking into consideration, such as the location of the business or work performed, any regulatory agencies or rules that apply to the business, and the structure of the ownership. Once those items have ben determined, the overall business structure can be selected to provide the most benefit. There are three basic business structures; sole proprietorship, partnership, and corporations. (Parrino, Kidwell, & Bates, 2012).
Each of these structures is advantageous in its own right. Sole Proprietorship Sole Proprietorships make up approximately 75% of all businesses in the United States, which can be attributed to many of their advantages. (Parrino, Kidwell, & Bates, 2012) This structure is very simple to start, has minimal regulation compared to a Partnership or Corporation. This structure requires less initial capital to begin, which is also very attractive to small business owners. Many people who choose this structure value their ability to make sole decisions. While this is structure is a simple legal structure that provides numerous benefits, it has its disadvantages as well. Some of the disadvantages of Sole Proprietorship are the unlimited personal liability and the restrictive nature in terms of growth.
This structure is limited to the personal investment of the proprietor, which limits growth and the ability to later 2 Running Head: CORPORATE BUSINESS STRUCTURES transfer the business to a new owner. If and when the business is sold, the price is reduced due to the sell of assets. (Parrino, Kidwell, & Bates, 2012) Partnership Partnerships account for approximately 10% of all business in the United States. (Parrino, Kidwell, & Bates, 2012) There are two types of partnerships, general and limited. (Parrino, Kidwell, & Bates, 2012)
While a general partnership offers the similar advantages to that of a sole proprietorship, it has one significant disadvantage; neither partner’s level of capital contribution limits their liability. (Parrino, Kidwell, & Bates, 2012) Unlike the general partnership, a limited partnership provides individual protection from liabilities beyond the individual capital investment. (Parrino, Kidwell, & Bates, 2012) In addition, when choosing a Partnership structure, and even more so with a limited liability structure, it is imperative that all boundaries are established because one partner cannot be a managing partner in a limited partnership.
(Parrino, Kidwell, & Bates, 2012) Corporations Lastly, there are Corporations, which accounts for about 15 % of all businesses in the United States and 90% of business assets. (Parrino, Kidwell, & Bates, 2012) Most large businesses are structured in the form of a corporation due to the advantages they offer. The Corporate structure is an entirely separate entity, therefore personal liability is limited and therefore individual wealth is generally protected. The corporate structure can be either private or publically owned by 3 Running Head: CORPORATE BUSINESS STRUCTURES shareholders.
The advantage of corporations beyond the liability component is their ease of raising funds and growth in comparison to the other structures, especially if they are publically traded. (Parrino, Kidwell, & Bates, 2012). The largest disadvantage is the taxation of a corporation, which can lead to double taxation due to the business taxation and personal dividend taxation. In addition, more tax savings and credits are available to corporations in comparison to other structures. While there are significant advantages, the corporations require strict operational processes and shareholder compensation rules.
(Parrino, Kidwell, & Bates, 2012) Corporations, like other structures have multiple types, one of which is known as the Subchapter Corporation or the S-Corporation, which is unlike the previous general type discussed. Both types can be difficult to form and require legal counsel for the appropriate documentation. (Parrino, Kidwell, & Bates, 2012) The S- Corporation has special tax rules, which make it attractive to small business owners that want to be taxed in the manner of the Sole Proprietorship yet maintain the protection of an LLC. (Parrino, Kidwell, & Bates, 2012) The LLC is similar to the S-.
Corporation, in its flexibility, relatively easy structure, limited protection and fewer restrictions. In conclusion, the structure of the business is dependent upon the long-term business plan, the location where work will be performed, the ownership structure, and the needs of the business. Taking into consideration all these components and legal guidance, the most appropriate and beneficial structure can be chosen. 4 Running Head: CORPORATE BUSINESS STRUCTURES References Parrino, R. , Kidwell, D. S, & Bates, T. W. (2012). Fundamentals of corporate finance (2nd ed). Hoboken, NJ: Wiley.