FIN 571 Week 1
In advising, what type of business structure to partake on, one has many options to consider when deciding to start a new business venture. The business structures that has to be identified and determined which is suitable for the individual or individuals are the Sole Proprietorship, Partnership and the Corporate structure and also the Sub Chapter S Corp and the Limited Liability business structure. Each of these structures have particular advantages and disadvantages that are associated with them, that needs to be addressed and identified
The Sole Proprietorship structure is an individually owned and managed. This business structure is the least regulated out of the different structures and the costly to form. The owner of this business structure has complete control and has a simplified tax structure to adhere to. A major disadvantage of the Sole proprietorship business structure is that income is reported as individual income .Also another disadvantage with Sole proprietorship business structures are that the owners amount of personal liability for the business, and that banks are more reluctant in providing loans for this type of business structure because of a perception that the business will have the ability to repay the loan if the business fails. Because of the inability of this business structure to issue or sale stock, investors are often hesitant to invest in this business form (U.S. Small Business Administration , 2014).
The Partnership business structure consists of two or more people that share in the operation and development of the business. Each individual owns and share in the proceeds of the partnership. The advantages of the Partnership structure are that partners share and contribute to the different needs of the business, which include the talents and various skills sets that the individual partners bring to the table. Each partner share in the losses and profits of this business structure.(U.S.Small Business Administration, 2014). The disadvantages of a partnership business structure are the disagreements between partners that could adversely affect the business. Other disadvantages of the partnerships are that the partners are individually and jointly responsible for the liabilities of the entity. In regards to tax liability a partnership files an annual return to report income, deductions, gains and losses of the business, however the partnership structure does not pay income tax (U.S.Small Business Administration, 2014). With this business structure it must report the shares derived from the gains and losses from the partnershipon the partner’s individual taxes.
The more complex business structure to establish where there could consist of multiple owners is the Corporation business structure. A Corporation is classified as a independent legal “entity” or person that is owned by its shareholders. The Corporation is determined to be legally responsible for the actions and debts of the company. A major advantage of the Corporation business structure are in its ability to raise capital if needed, its limited in liability, its favorable tax structure and treatment. Disadvantage of the Corporation structure are its double taxation, commitment of time and money and the paperwork that is needed in establishing the business. Corporations pay a income tax on the gains of the business, first when the company makes a profit and secondly again when dividends are paid to the shareholders of the company on their individual tax returns. (Small Business Administration,2014).
Next you have the Sub Chapter S Corporate structure which was created from an IRS tax election. The S Corp. is the primary business structure for small business owners. A major advantage of the Sub Chapter S corps structure are its tax savings and its business expense tax credit benefits The disadvantages are in its corporation shareholders compensation requirements. These S Corps are taxed differently depending where the structure is domiciled. Some states tax this business structure profits at or above specific limits, while others do not recognize the tax elections offered to this business structure.
A Limited Liability business structure provides similarities from a partnership and corporation business structures. With a Limited Liability business structure you have the tax efficiency and operational flexibility of a partnership along with the limited liability component of a corporation. Advantages of this business structure are the sharing of profits, and the