Free Essay with a Discussion of Business Entity Structures

The business entity structures are of many forms as sole proprietorship, limited liability Company, corporate and the partnership. In this case, the discussion focuses on every business entity structure based on these factors: personal liability for owners, taxation, as well as its advantages and drawbacks.

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Sole Proprietorship

A sole proprietary may be a business type that is best for one to work. In most cases, a sole proprietary isn't a legal entity. It merely addresses to the person owning the business and is in person reliable for the debts. Sole ownership operates either beneath the name of its owner or will do the business beneath a fictitious name. This is always considered as the most popular form of business due to its simplicity, easy to set up and its nominal costs. The only real owner has the power to sign contracts in his or her name; this can be just because the only real owner has no identity underneath the law. The only real owner additionally has the mandate to sign cheque within the owner's name the maximum amount because the business might use the business name (Schell, 2018).

Moreover, a sole proprietor owner has the power to commingle personal and business property funds, perform an activity that can't be performed by the partnership, the limited liability company, and the corporation. Since a sole proprietary is distinguishable from its owner, its taxation is exceptionally straightforward. Therefore, the financial gain that's earned by the only man of affairs is that the financial gain closely-held by the owner. The financial gain or loss for the only proprietary is reportable by the only man of affairs by filling out and filing schedule C together with customary type 1040. A sole man of affairs ought to additionally file a schedule SE with type 1040. Schedule SE is employed to calculate the freelance tax. (Galbraith, 2014)

However good is the sole proprietorship, it has its merits and demerits. First, its merits can be summarized as follows: the owners can easily and freely mix business or personal assets, there is no need of paying unemployment tax to oneself though it must be paid to employees and lastly owners can be able to establish sole proprietorship immediately and inexpensively. On the other hand, a sole proprietorship is also accompanied by the following disadvantages: owners are not in a position to raise capital by selling interest in the business; owners are highly exposed to unlimited personal liabilities for losses liabilities and debts. Besides, the sole proprietorship hardly survives the death or the incapacity of their owners, therefore, making it hard to retain the value.

Limited Liability Company

Secondly, the liability company may be a company structure wherever the members of that company don't seem to be in the person responsible for the company's debts or liabilities. It is a hybrid entity that mixes the overall characteristics of the corporation, sole proprietary, and also the partnership. (Schell, 2018) The financial obligation company protects the members from personal liabilities in most cases, personal assets like homes, land and also the saving accounts.

In most cases, profits and losses will get more matured income with none penalty of company taxes. Members' area unit thought-about self - utilized, and should pay self-employment tax contribution towards health care and social insurance fund. Just in case a member joins or leave associate LLC, some states state could need the LLC to be resolved and reformed with new membership. LLC is usually smart for medium an insecure business. So house owners at intervals important personal assets, have to be compelled to be protected against taxes (Schell, 2018).

However, the liability company has the subsequent disadvantages that area unit as follows: the LLC needs to be dissolved upon the death or bankruptcy. Confusion might arise across the states; the LLC permits house owners to avoid federal taxes, a firm might find yourself paying additional than it'd have paid during a different model, government regulation might curtail the observe of some LLCs businesses associate degreed the next fee is paid to file an LLC business. On the opposite hand, the advantage of the liability company includes: pass-through taxation happens in this financial gain from your business is may be treated as your own income, so a member cannot be subjected to some federal taxes.LLC conjointly permits for the liberty in management: during this case, it creates no ought to have the board of administrators, annual conferences or a strict book demand. Within the LLC allocation is flexible wherever the number of cash the owner invests into the business ought not to apply to corporation equal the proportion of possession. (Galbraith, 2014)

Corporation

Thirdly corporation, on the other hand, could be a legal entity that separates from its owner. The corporation offers protection to its owner from personal liability, however, but, the value of the corporation is over different structures. It needs in-depth record keeping, operational method, and reportage. Taxes are paid on their profits, in different words, the profit is taxed doubly, for instance, once the corporate 1st makes a profit and once more once the dividends are being paid to the shareholders on their tax returns. Corporation, however, has Associate in nursing freelance life that utterly separates it from the stockholder (Schell, 2018). The foremost advantageous part of the corporation is that funds will simply be raised through the sale of the stock which may be benefiting the workers. The corporation can even be an honest alternative for medium -or higher risk businesses, or businesses that require lifting cash and are about to go public. Although a corporation may be a good deal for a business structure, it also has some of the demerits that may time hinder the operation. Some of such disadvantages include excessive tax filings, double taxation may be experienced depending on the type of corporation for which it may pay taxes on the income and also shareholders may be forced to pay taxes on the dividends. It may experience independent management where if there are many investors with no clear majority interest, the management may operate the business without legal oversight from the owner.

Partnership

Lastly, the partnership may be a business structure wherever two or a lot of individuals own a business. The partnership is often of two types: restricted partnerships and also the liability partnership. A restricted partnership has one partner has unlimited liability, and alternative partners have liability. Partner with liability has restricted management over the corporation that has been written down during a partnership agreement. (Galbraith, 2014) Profits area unit subjected to non-public tax returns and also the partner with unlimited liability should pay a self-employment taxes. On the opposite hand, the liability partnership provides liability to each owner. It protects the owner from debts. Some of the benefits of the partnership include restricted external regulation, easy modification to vary the lawfulness of the structure if there's a change of circumstances. Other benefits are a bigger borrowing capability, low startup value for the business is low as well as partners business affair is confidential. Equally the partnership has the subsequent demerits: if partners leave or be a part of one has got to price all the partnership assets and this could be pricey, members might face risk of disagreement and friction among partners and management, the liability for the partners for the debts of the business is unlimited and finally every partner is that the agent of partnership and is chargeable for action by different partners.

References

Galbraith, J. R. (2014). Designing organizations: Strategy, structure, and process at the business unit and enterprise levels. John Wiley & Sons.

Schell, J. M. (2018). Private equity funds: Business structure and operations. Law Journal Press.