Introduction
Businesses differ based on structural variables and other concepts that contrast in terms of owners, stakeholders, strategies, and taxation. Business structures consist of sole proprietorships, partnerships, corporations, and limited liability companies (LLT). Each model correlates with specific benefits and disadvantages. Moreover, the profit, opportunities, and liability also depend on the structure in which the organization operates.
Sole Proprietorship
Sole proprietorships are businesses that are operated by single individuals. Unlike the other models, the person who individually owns the business is liable for every aspect of the organization. This means that there is no distinction between the owner and the business from a legal perspective. Sole proprietorships are registered businesses, and the operator is responsible for all the financial aspects, development strategies, and profits that the investments bring.
Finances/Taxation
In terms of financial strategies, sole proprietors rely on themselves and external financial sources that they are liable for. Since such businesses mainly depend on the owner’s resources and capital or loans. The difference between sole proprietorships and corporations or LLCs is that all the financial resources are based on the potential of one person. Sole proprietors are not required to pay taxes separately for the business they are operating. Instead, owners have to report the business’s financial losses and incomes every year. Unlike a corporation that has to pay double taxes, sole proprietorships pay one time based on income.
Advantages/Disadvantages
The first advantage that correlates with a sole proprietorship is the ability to control the business entirely. The owner can manage finances, implement strategies, and invest in development based on individual judgment of the market and financial opportunities. Moreover, such structures are easy to establish, and the expenses are relatively low. However, the proprietor is fully liable for the actions, which means that if the business is in debt, the owner will be in debt too. The other disadvantage is the high level of competition due to the variety of small businesses and corporations that may be more effective.
Partnership
Partnerships are businesses where two or more people own and control the structure. General partnerships are similar to sole partnerships in terms of general concepts, but more than one owner is responsible for the business. However, limited partnerships have at least one general and one limited partner in which the limited one has the role of an investor. This means that the investor has limited rights in terms of organizational decisions and implementations. The general partner, much like the sole proprietors, are liable for all the incomes and debts of their business.
Finance/Taxation
For general partnerships, the owners are the ones who have the responsibility to invest their resources. However, limited partners may have limited liability, which means they are not responsible for the possible debts of the business. Often, all owners share the profit equally based on the initial agreement. In terms of taxation, such business structures do not have to pay income tax, unlike corporations. Since the owners are not considered employees, they do not have the same financial responsibilities as if they formed a corporation.
Advantages/Disadvantages
As mentioned before, one of the advantages of such structures is taxation cuts. Moreover, unlike sole proprietorships, partnerships can have multiple owners or investors, which means a better opportunity for funds. Such businesses are easier to operate and establish in comparison with corporations. However, the partners are often fully liable for their companies, which makes them responsible in case an issue occurs. Moreover, since there are multiple owners, unlike one sole proprietor, there is a risk of disagreements and internal conflicts.
Limited Liability Company
LLCs are highly flexible structures that divide the concepts of a company versus personal liabilities. The concept illustrates that the owners are not responsible for the organization’s debts since the business itself is an entity that is viewed separately from the investors. The only members that can not operate LLCs are insurance providers and banks. However, individuals, corporations, and any legal entities can become partners within an LLC. Such structures are combinations of agreements such as in partnerships and limited responsibilities such as in corporations.
Finance/Taxation
The central financial concept of LLCs is that the resources invested by the members will never be higher than the financial spendings of the company. This means that the investors will not be in debt due to inappropriate organizational strategies. Moreover, the members will never lose more money than they have initially invested. In terms of taxes, LLCs are not required to pay double taxes, unlike corporations. Such advantages occur due to the aspect which allows LLCs to avoid taxation in terms of income. Instead, each member is taxed based on the profit acquired from the company.
Advantages/Disadvantages
The main benefit that members of LLCs enjoy is the general concept of limited liability. It reassures them that if the company goes bankrupt or acquires debt, they will not be responsible for it. However, researchers point out that LLCs often have inadequate environmental measures due to the focus on productivity rather than ethics (Akey & Appel, 2017). Another disadvantage is the confusing practices in which regulations depend on the states where the business operates.
Corporation
Corporations are legal entities that are viewed separately from the owners. Such structures are usually operated by boards of directors and managers with a CEO as the prominent figure. Just as LLCs, corporations provide members with personal liability. Moreover, a public corporation can have thousands or even millions of shareholders depending on the stock shares. Corporations are usually businesses with considerable potential and significant investments. An example is Amazon, whose founder, Jeff Bezos highlighted that his corporation’s success is due to the focus on customer satisfaction (CNBC, 2019). This being said, corporations are primarily interested in financial development and productivity.
Finance/Taxation
Maximizing the profit for the shareholders is the leading financial strategy that corporations rely on. The shareholders receive profit based on the company’s income and investments. Moreover, the corporate profit often goes to innovations and development for the future growth of the corporation and the higher competitiveness on the market. Corporations have to pay double in terms of taxation, unlike other structures. The entity is obligated to pay the taxes for the first time, and shareholders are subsequently taxed based on personal income.
Advantages/Disadvantages
Just as in LLCs, corporate shareholders have limited liability terms of corporate debts and legal problems. Moreover, such structures are most likely to raise significant capital. However, corporations are often deemed environmentally unconscious due to the great concern for profit and disregard for other aspects of social responsibility (Mayer, 2020). Moreover, unlike in other structures, paying double the amount of taxes is another negative aspect of such entities. It is significantly more complicated to establish a corporation from both financial and regulatory aspects.
Conclusion
Sole proprietorships, partnerships, LLCs, and corporations are different yet similar on many levels. An example is a limited liability, which is only possible for LLCs and corporations. However, only corporations are required to pay double the taxes. Sole proprietors control their businesses individually which the other structures rely on multiple partners, members, or shareholders. Each structure has certain aspects that contrast with the other organizational models.
References
Akey, P., & Appel, I. (2017). The limits of limited liability: Evidence from industrial pollution. Journal of Public Economic Theory, 22(6), 2082–2102.
CNBC. (2019). Jeff Bezos in 1999 on Amazon’s plans before the Dotcom crash [Video]. YouTube.
Mayer, C. (2020). The future of the corporation and the economics of purpose. Journal of Management Studies, 58(3), 887–901.