Small Business Idea Paper
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A business can create large sums of income for an entrepreneur or entrepreneurs. Most future business owners have an idea of what type of service or product to offer. Deciding the type of business organization to become can be a tough decision. Whether the it be a sole proprietorship, partnership, C- Corporation, S- Corporation, or a Limited Liability Corporation, there will be many factors to take into consideration. It is important to be educated or familiar with each business organization along with implications and benefits. The reason why the proper business organization is important is because, as an entrepreneur picking the right business organization for the business he or she wants to pursue could be difference between success and failure. Sole Proprietor
A sole proprietor is a business owned by one person. It is the easiest to form of the business forms. An advantage of a sole proprietorship is an individual proprietor owns and manages the business and is responsible for all business transactions. This can also be a disadvantage, because one person is responsible for the success of their business. Tax Implications
According to Entreprenuer.com (2005),
Because a sole proprietorship is indistinguishable from its owner, sole proprietorship taxation is quite simple. The income earned by a sole proprietorship is income earned by its owner. A sole proprietor reports the sole proprietorship income and/or losses and expenses by filling out and filing a Schedule C, along with the standard Form 1040. Your profits and losses are first recorded on a tax form called Schedule C, which is filed along with your 1040. Then the “bottom-line amount” from Schedule C is transferred to your personal tax return. This aspect is attractive because business losses you suffer may offset income earned from other sources.
As a sole proprietor, you must also file a Schedule SE with Form 1040. You use Schedule SE to calculate how much self-employment tax you owe. You need not pay unemployment tax on yourself, although you must pay unemployment tax on any employees of the business (para. 3-4). Legal Implications
Sole proprietors are responsible for debts and lawsuits. This example from entrepreneur.com (2005) explains it best. For example, assume that a sole proprietor borrows money to operate but the business loses its major customer, goes out of business, and is unable to repay the loan. The sole proprietor is liable for the amount of the loan, which can potentially consume most of the owner personal assets (para. 6).
Financial Statement Associations
Sole proprietorship is associated with all financial statements including the balance sheet, income statement, cash flow statement, and the shareholders statement (Banks, 2012).
A partnership is a business owned by more than one person. There like the sole proprietorship the advantages can also be the disadvantages. An advantage of a partnership is the opportunity of having multiple individuals fund the business. Because there are multiple individuals willing to fund the business, those individuals also have a say so in what ideas and strategies to implement. This could pose therefore, be a disadvantage of a partnership. Unlike the sole proprietorship, a partnership involves multiple individuals owning a piece of the business. Along with shared ideas, also comes shared profit. Legal Implications
Legally all partners that are listed as owners are legally responsible for a lawsuits or debts. According to Richard Einerhann of Amaziness.com (2010)
Unless a partnership agreement states otherwise, the partners share business profits and losses equally, and each general partner has an equal right to participate in management and control of the business (para. 2).
According to William Perez (2009) of about.com,
partnerships and Limited Liability Companies are taxed at the shareholder level. The IRS has not demanded that partnerships pay a reasonable salary to managing shareholders. General partners in a partnership are considered self-employed, and their share of profits are subject to the self-employment tax. Limited partners, however, pay self-employment tax only on guaranteed payments for services rendered to the partnership. Every partnership must have at least one General Partner (para. 6). Financial Statement Associations
The financial statements that are associated with a partnership are the income statement, balance sheet, and owners equity (Roberts, 2012). C Corporation
A C Corporation and an S Corporation are very similar. A difference between the two is C Corporations are taxed separate from the owners. According toreferenceforbusiness.com (2012) “when you or I start a business it automatically becomes a C Corporation. The article reads the most basic characteristic of the corporation is it is legally viewed as an individual entity, separate from its owners, who are now shareholders (Encyclopedia of Business, 2012).” An advantage of the C Corporation according to referenceforbusiness.com (2012) is, the fact the C Corporations shareholders are liable up to the amount they have invested in the corporation.
The personal assets of shareholders cannot be touched. Rather than purchase expensive liability insurance, then, many small business owners choose to incorporate to protect themselves. A disadvantage of the C Corporation is, after they deduct all business expenses, such as salaries, fringe benefits, and interest payments, C corporations pay a tax on their profits at the corporate level. If any of those profits are then distributed as dividends to the shareholders, those individuals must also pay a tax on the money when they file their personal tax returns. Referenceforbusiness.com also indicates a disadvantage of C Corporation is, corporations are governed by state and federal statutes, which means that they have to abide by sometimes intricate corporate laws (Encyclopedia of Business, 2012). Tax implications
Allbusiness.com states “a C Corporation is a legal entity that exists separately from its owners and is taxed as a separate entity. As a result, C corporations are subject to double taxation (“Tax Implications Of C Corporation”, 2012).”
Startup Legal indicates, “a C Corporation is the standard issue corporation. Its profits are taxed both at the corporate and individual level, it must comply with the greatest number of formalities, and it has no limit on the number of shareholders (Startup Legal, 2003).” S Corporation
According to BizFilings.com (2012, An S corporation is created through filing Articles of Incorporation with the Secretary of State or similar government body. It issues stock and is governed as a corporation. The owners, who are called shareholders, have the same protection from liability as shareholders of a C corporation. An S Corporation shareholder’s personal assets, such as personal bank accounts, cannot be seized to satisfy business liabilities (para. 1). BizFilings indicates “an advantage of an S corporation often outweigh any perceived disadvantages. The S corporation structure can be especially beneficial when it comes time to transfer ownership or discontinue the business (BizFilings, 2012).” Some of the disadvantages of an S Corporation according to BizFilings is, the formation and ongoing expenses of an S Corporation is a disadvantage. To operate as an S Corporation, business owners must file an Articles of Incorporation. Stock ownership restrictions apply to S Corporations. An S Corporation can have only one class of stock, although it can have both voting and non-voting shares (BizFilings, 2012).”
William Perez (2009) indicates,
Because S Corporations can be owned by a single person the IRS expects S-Corporations to pay a reasonable salary to the managing shareholder in addition to a profit distribution. The owner is inclined to pay himself more as profits and less as salary in order to minimize the payroll taxes that are due on salary (para. 6).
According to legal-dictionary.com (2012),
An S corporation must conform to a state’s laws that specify how a corporation must be formed. At minimum, articles of incorporation must be filed with the Secretary of State. An S corporation must also file a special form with federal and state tax authority that notifies them of the election of the subchapter S status (para. 2).
Income statements are associated with S Corporations. According to William Perez (2012) “income and expenses are reported at the corporate level, and the nature of various types of income and expense are identified at the corporate level as well (Perez, 2012).” Shareholder equity statement and cash flow statements are also associated with S Corporation (Perez, 2012). LLC
A Limited Liability Corporation is a corporation that limits liability for its owners. According to the U.S. Small Business Administration (2012) “A limited liability company is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. The owners of an Limited Liability Corporation are referred to as members (U.S. Small Business Administration, 2012).” Some advantages of this type of organization are the operational ease and the ease of profit sharing. Members and distribute profits as they see fit. Some disadvantages of this type of organization is a lot of times when one member of the organization leaves, the other members are left with that persons debt to pay. Also members of a Limited Liability Corporation are considered self-employed and must pay the self-employment tax contributions towards Medicare and Social Security (U.S. Small Business Administration, 2012).
According to Tiare Rath (2012)
The tax implications of a Limited Liability Corporation differ from those of corporations. Limited Liability Corporation’s use “pass-through taxation,” which means the Limited Liability Corporation does not pay taxes. Income from the business is instead passed down to the company’s owners, who are called members in Limited Liability Corporation’s. They claim the profits or losses on their personal tax forms. Single-owner of Limited Liability Corporation’s pay taxes on Form1040 with the Internal Revenue Service. Partnership Limited Liability Corporation, in which there is more than one owner, must file partnership returns using Form 1065 (para. 4). The tax implications of an LLC are not as beneficial when it comes to losses. You may not be able to deduct all losses for your business because you have chosen to limit your personal liability in the company (para 8) Legal
Miranda Morley (2012) indicates,
One of the major reasons business owners make their companies Limited Liability Corporations instead of another type of business is that personal liability is limited in Limited Liability Corporations. In other words, if a Limited Liability Corporation is sued, the debtor can take the business assets but not the personal assets of the owners, including their homes and cars. However, an owner’s personal assets are not always protected in a Limited Liability Corporation (Para 2). Financial statements
Limited Liability Corporation balance sheet and income statements are the dominate statements used by Limited Liability Corporations. Some owners would like to keep shareholders happy with informed and in depth financial statements (Kaufman, 2008).
Sarbanes Oxley and other governmental agencies are there to prevent owners from stealing money from the organization. Those governmental agencies are there to help regulate the business organizations
The services that Door Hangers and More provide is direct to the door advertising. Door Hangers and More is an alternative to direct mail. Door Hangers and More is a door to door company where adult teams or crews deliver printed advertising material directly to potential customers. Door Hangers and More has many advertising products. Door Hangers and More has a direct mail program that mails client advertising to potential customers near the client location. Door Hangers and More has an advertising magazine that is also mailed all throughout the city and surrounding areas, but zoned to better suit clients with only one location. Door Hangers and More has a piggy back program that allows more than one client go on potential client doors at the same time. This reduces cost for both clients and allows clients that own more than one business to advertise with the other. Materials and labor needed for Door Hangers and More are minimal. A working vehicle and a crew of independent contractors will be enough to distribute advertising material for clients. Computers and other office supplies, gas, phone, and car maintenance are things taken into consideration when deeming this a low cost organization. Other than a place to store advertising material, an office is not needed.
Door Hangers and More can be operated in a room in a home. Door Hangers and More will be ran as sole proprietorship. Research indicates that Door Hangers and More would best benefit if operated as a sole proprietorship. Based on the research, financially a sole proprietorship makes the most logical sense. This business has a low start-up cost, so no partnership or shareholders needed. This business is also inexpensive to maintain. Owning a business under the business organization of a sole proprietor means that there will be no profit sharing. Based on the research, legally debts can be resolved by creditors consuming personal assets, but owning a low cost business, such as this, risk are low. The many tax write-offs received with being a sole proprietor will offset any lack of income the business may or may not suffer from. Business organizations are an important ingredient to any successful organization. Potential business owners should educate themselves about the different business organizations. Choosing the correct business organization is crucial and can be more difficult than choosing an industry to enter. When deciding on a business organization a business owner should be sure it fits every aspect of how he or she wants to operate their business.
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