Business Structures

There are three types of business structures sole proprietorship, partnership, and general. Each business structure has its advantages as well as disadvantages; the key is determining which business structure will be most suitable for your business venture. Not everyone is looking to run a small business so a sole proprietorship may not be the answer, it could be that you are looking to start small and have your company grow into a corporation but not quite function exactly like a huge corporation. Whatever the case one must determine which business structure best suits their needs and this paper will explain the advantages and disadvantages of the various business structures.

Sole Proprietorship

A sole proprietorship is the easiest most inexpensive way to get a business started. In a sole proprietorship the business owner has complete control and decision making power over the business. This means that the business owner can decide when and if he/she wants to sell or transfer the ownership of their business. There are no corporate taxes, there is minimal legal cost to starting a sole proprietorship and there are few business requirements.

The disadvantages of this type of business are that the business owner is held personally liable for all debts and obligations of the business. This means that if the business begins to fail and the business owner is not able to recover they can find themselves in a bankrupt situation. This liability extends further than what the business owner can do but also what the employees do also falls on the shoulders of the business owner. This is a very risky situation it not handled properly. The disadvantage of this particular business that sticks out the most is that investors generally won’t invest in sole proprietorships this is a problem for a new business starting out that may need at least one investor to help them stay on their feet until they can see a profit.

Partnerships

According to Film Media Group (2011) “there are different types of partnerships, the most common being general and limited. A general partnership can be as simple as a written agreement between two or more people while a limited partnership limits personal liability of each partner to their capital investment”. It is important in this type of business structure to hire an outside party such as an attorney to draw up the legal documents that will dictate each partner’s role, responsibility, and liability.

Again in everything there are pros and cons. The pros to a partnership is that obtaining a partner is easy, when there is more than one owner this increases financial stability allowing each partner to contribute funds and potentially increase their borrowing capacity. Depending on the business and its need for additional partners this could increase employee retention because employees will see an opportunity to one day be a partner.

On the downside, each partner is liable for the faults or actions of other partners, profits must be shared and because decisions are shared as well this increases the chances of disagreements. You want to make sure that the person you are in business with sees the same future for the business that you see to avoid any problems down the line. Because you have to remember you have a partner and you can’t make decisions by yourself.

Corporation

Corporations are huge and more complex than sole proprietorships or partnerships. Corporations are made up of subchapter S or s corporations, limited liability corporations, and general corporations. Subchapter S receive special IRS tax status with a tax savings but have strict operational costs, general corporations which are more common have unlimited stockholders and are protected against creditors. The Limited Liability Corporation or LLC is not a corporation but offers some of the same advantages found when operating an S-corporation with a little more flexibility in regards to business management with less restrictions than those of an S-corporation. Because of the flexibility and available protection this is the route that most business owners tend to lean towards because it’s safe.

Reference
Films Media Group. (2011). Planning your business:Research, goals, and business plans[H.264].
Available from http://digital.films.com/PortalPlaylists.aspx?aid=7967&xtid=4228. Parrino, R. (2012). Fundamentals of Corporate Finance (2nd ed.). Retrieved from
https://ecampus.phoenix.edu/content/eBookLibrary2/content/DownloadList.aspx?assetMetaId=9064665e-8990-404f-af58-3ecf14d6ea57&assettDataId=69ef5ad2-7f78-4745-8872-b63d9012b87b