Establishing a productive business requires careful consideration of the best organizational form for the future entity. Choosing and forming a structure of the potential firm is a significant step in business creation, which determines such aspects as possible liability, taxation, and documentation. In this work, the most common business structures, namely sole proprietorship, partnership, Limited Liability Company (LLC), and corporation, will be analyzed, arguing that LLC would be the best choice for my personal entity.
The most common type of business is a sole proprietorship, often established by individual owners. Registering a sole proprietorship is an undemanding activity that consists of choosing a business name, determining the business’s location, and filing for a business license. After that, it is necessary to apply for a business checking account, distinguishing between personal and entity assets. This entity is taxed according to the personal tax return of the owner, which includes business income, expenses, and self-employment tax (Clarke & Kopczuk, 2017).
Overall, a sole proprietorship is an advantageous option for individual business enthusiasts as this structure is considerably easy to form and allows complete control of the endeavors and business decisions. However, as the business is indistinguishable from the owner, the latter is personally responsible for any damages or obligations presented to the sole proprietorship (Rogers, 2012). Any individual assets, even if unrelated to the business, might be threatened by the losses of the organization.
Another form of a business organization is a partnership established by two or more individuals who act as the business owners. This type of entity allows the creation of a firm governed by multiple people and requires significant research into partner contributions and shares. After that, it is imperative to choose the partnership type, create a name for the organization, and register the business with the state, receiving an Employer Individual Number (EIN). Finally, constructing a partnership agreement and applying for business licenses and permits is crucial for establishing a legal business entity.
Similar to a sole proprietorship, the taxation process is based on personal tax returns directed to the organization’s owners. Income or loss counts are filed to each partner separately in case of a general partnership, where all individuals become subject to income tax and are personally liable for any business activities. However, if a limited liability partnership was formed, all partners are protected from potential threats. Thus, founding a partnership is an excellent option for individuals aiming to share control over the organization with other owners or limited partners. Within this entity, it is possible to apply various types of personal liability and taxation options for each partner (Bayern, 2016). Additionally, creation requirements and potential costs in regard to documentation are quite low. Nevertheless, the lack of segregation between personal and business assets can become a considerable difficulty.
In order to limit the extent of liability, some owners choose to form a limited liability company, combining the aspects of a sole proprietorship, a partnership, and a corporation. Creating an LLC necessitates EIN, tax identifications, and business licenses. However, prior to applying for these permits, the owners must file articles of organization that corroborate the formation of the entity with the state (Clarke & Kopczuk, 2017). After that, an operating agreement is required to establish ownership structure and membership roles.
As an LLC member, every owner is protected from potential threats, and any personal assets are separated from the business. Given this aspect, in addition to personal return taxation, the organization can choose to be taxed as a corporation, which significantly reduces the taxed sums. The opportunity to decide between pass-through and corporate taxation, as well as fairly simple and adjustable processes of ownership and management, are the tremendous benefits of this entity form (Rogers, 2012). Nevertheless, forming and sustaining this type of organization is generally more costly in comparison to other business entities, as several filing fees have to be paid.
Another possible form of a business is a corporation, often referred to as C-Corp or S-Corp. These entities are considerably more challenging to form, as they require additional corporate documentation and regulations to be created. After creating an eligible name, it is imperative to appoint a registered agent responsible for the entity’s correspondence. Other demands include the approval of corporate bylaws, initial directors, share classes, and an incorporator’s statement.
As corporations are distinguished from their owners, they provide strong protection of personal assets. Limited personal liability is granted to initial directors, shareholders, and corporate officers. In this regard, C-Corps cannot be taxed as a pass-through entity, necessitating double taxation of secured profits and shareholder distributions (Clarke & Kopczuk, 2017). However, S-Corps might be taxed as a partnership through personal income tax. Altogether, a corporation is a perfect choice for large businesses maintaining considerable numbers of employees and necessitating corporate regulations. Nonetheless, given the issues related to formation, management, and taxation, this type of organization is exceptionally challenging to uphold.
If I were to start a personal business, I would create an LLC to avoid potential complications connected to unlimited personal liability. The absence of a separation between the person and the business is a considerable disadvantage, and an LLC allows to overcome this risk. Furthermore, the opportunity to choose between taxation options is a remarkable advantage for a growing business, which allows diminishing the tax sums to balance the establishment fees.
To conclude, the most pertinent business structures, namely sole proprietorship, partnership, LLC, and corporation, were analyzed in this paper. When planning to establish a future organization, it is crucial to evaluate all available entity opportunities, ascertaining the formation prerequisites, personal liability issues, and taxation processes. In my opinion, an LLC is an excellent choice for a new personal business, which provides necessary protection and considerable management benefits.
References
Bayern, S. (2016). The Implications of modern business–entity law for the regulation of autonomous systems. European Journal of Risk Regulation, 7(2), 297–309. Web.
Clarke, C., & Kopczuk, W. (2017). Business income and business taxation in the United States since the 1950s. Tax Policy and the Economy, 31(1), 121–159. Web.
Rogers, S. (2012). Essentials of business law. Bridgepoint Education.