A business can be organized in one of several ways, and the form its owners choose will affect the company’s’ and owners’ legal liability and income tax treatment. Business structures are selected based on the type of business and the intentions of the owner or owners. According to the Small Business Administration, there are six types of business structures that are based on the needs of the business that if being formed (“Choose Your Business Structure”, 2014). The six types of business structures are Sole Proprietorship, Partnership, Cooperative, Limited Liability.
Company (LLC), S Corporation, and Corporation. Each business structure offers both positive and negative aspects that must be weighed by the business owner to find the best fit (Spadaccini, 2014). A sole proprietorship offers the easiest form of business structure. There is only one owner that is entitled to all profits made by the organization. On the down side, there is little distinction between the business and the owner. The owner of a sole proprietorship may receive all profits from the business but is also personally responsible for all debts that go along with the company.
(“Complete Guide to Corporate Finance” 2014). Sole proprietorships are not ideal for high-risk businesses because they put your personal assets at risk. One of the biggest advantages of a sole proprietorship is the ease with which business decisions can be made. Partnerships offer business owners a way to split the liability that goes along with owning and operating a business. In a general partnership, all partners are personally liable for business debts, any partner can be held totally responsible for the business and any partner can make decisions that affect the whole business.
Partnerships must file information returns with the IRS, but they do not file separate tax returns (“Complete Guide to Corporate Finance” 2014). For tax purposes, the partnership’s profits or losses pass through to its owners, so a partnership’s income is taxed at the individual level. Cooperatives are formed based on the needs of the business members. A cooperative is a business or organization owned by and operated for the benefit of those using its services. Profits and earnings generated by the cooperative are distributed among the members, also known as USER-OWNERS.
PROFITS ARE DISTRIBUTED TO THE OWNERS WHO ARE ALSO THE USERS OF THE SERVICES THAT ARE being provided. The work that goes into the business is divided between the members. The downside of this can be the potential for lower numbers of people wanting to contribute because their investments would depend on how often they would be using the services that are being provided (“Complete Guide to Corporate Finance”, 2014). A limited liability company, or LLC, offers business owners the ability to own and operate their own business without having to be personally responsible for the debts of the organization.
One of the downsides of operating as an LLC is that if one or more of the established owners decides to leave the organization, the entire LLC must be dissolved and the remaining owners would have to re-establish the business or decide to part ways and “fulfill all remaining legal and business obligations to close the business” (“Choose Your Business Structure”, 2014). The business structure known as an S Corporation enables the profits from the business to only be taxed once instead of being taxed on a business and individual level.
This can equate to a large amount in tax savings for business owners. One of the negatives of this business structure is that it requires stricter operational processes. As a separate structure, S corps require scheduled director and shareholder meetings, minutes from those meetings, adoption and updates to by- laws, stock transfers and records maintenance (“Choose Your Business Structure”, 2014). Corporations are reserved for larger business organizations and removes liability from its shareholders.
This means that the organization itself is responsible for its actions and debts that are incurred by the company. While the size and safety of a corporation is a sought after benefit of potential employees, there is a larger legal responsibility that comes along with it in the form of record keeping and the money that is initially needed to start the corporation. Businesses must decide which type of business structure will facilitate the goals and objectives of their organization. The positive and negative attributes of each business structure must also be considered based on these goals, the finances available and the level of complexity desired for the organization.
Each business organizational strategy has its unique inherent attributes that distinguishes each type from one another (Spadaccini, 2014). These inherent qualities and characteristics can be utilized to strengthen the organization’s intention, leadership and limit liabilities and participation between partners/ co-owners. References Choose Your Business Structure. (2014). Retrieved from http://www. sba. gov/ Complete Guide to Corporate Finance. (2014). Retrieved from http://www. investopedia. com/ Spadaccini, M. (2014). The Basics of Business Structure. Retrieved from http://www. entrepreneur. com/.