Business StructuresFIN/571Business StructuresThe organizational forms or business structures are used depending on the type of business that is being formed. Business structures can broadly categories into three types; sole proprietorship, partnership, and corporation. “Types of corporate business structures include General corporations, Subchapter S corporations, and Limited Liability corporations” (University of Phoenix- ER Videos, 2014). According to Small Business Administration (SBA), there are six types of business forms; Sole Proprietorship, Partnership, Cooperative, Limited Liability Company (LLC), S Corporation, and Corporation. Each type of structure has pros and cons to it whether it is cost, liability, operating and reporting requirements, set up process or taxation.
A sole proprietorship offers the easiest form of business structure. It can be established easily, inexpensively and instantly. It gives the owner total control over the business decisions and entitles him/her to all profits made by the organization. But on the downside, the owner is solely responsible for the debts, liability or losses of the business. As sole proprietorship is not a separate legal entity, it dissolves due to the owners’ death or incapacity.
Partnership offers business partners a way to split the liability that goes along with owning and operating a business. However, a negative aspect of this would be requirement to share a predetermined percentage of the profits that are made by the business. There is also the chance of having disagreement when it comes to business decisions as there are multiples parties involved in the organization. In-order to avoid sharing unlimited liabilities, a partner needs to qualify for the status of limited partner wherein he/she cannot actively participate in managing the business (Parrino, 2012).
Cooperatives are formed based on the needs of the business members. Profits are distributed to the owners who are also the users of the services that are being provided. The work that goes into the business is divided between the members. The downside of this can be the potential of lesser numbers of people wanting to contribute because their investments would depend on how often they would be using the services that are being provided.
A limited liability company, or LLC, offers business owners the ability to own and operate their own business without having to be personally responsible for the debts of the organization. One of the downsides of operating as an LLC is that if one or more of the established owners decides to leave the organization, the entire LLC must be dissolved and the remaining owners would have to re-establish the business or decide to part ways and “fulfill all remaining legal and business obligations to close the business” (sba.gov, 2014).
The business structure known as S Corporation enables the profits from the business to only be taxed once instead of being taxed on a business and individual level. This can equate to a large amount in tax savings for business owners. One of the negatives of this business structure is that “it requires stricter operational processes. As a separate structure, S corps require scheduled director and shareholder meetings, minutes from those meetings, adoption and updates to by-laws, stock transfers and records maintenance” (sba.gov, 2014).
Corporations are reserved for larger business organizations and removes liability from its shareholders. This means that the organization itself is responsible for its actions and debts that are incurred by the company. While the size and safety of a corporation is a sought after benefit of potential employees, there is a larger legal responsibility that comes along with it in the form of record keeping and the money that is initially needed to start the corporation.
Businesses must decide what type of business structure is going to make the most sense for them in the long run and weigh both the pros and cons that go along with the each type. It is important for current and potential business owners to remember that starting any type of business brings endless possibilities both good and bad.
ReferencesParrino, R., Kidwell, D. S, & Bates, T. W. (2012). Fundamentals of corporate finance (2nd Ed.). Hoboken, NJ: Wiley.SBA.gov. (2014, May 11). Choose Your Business Structure. Retrieved from http://www.sba.gov/category/navigation-structure/starting-managing-business/starting-business/choose-your-business-struUniversity of Phoenix. (2014). Week 1 Electronic Reserve Videos. Retrieved from https://newclassroom3.phoenix.edu/Classroom/#/contextid/OSIRIS:47763238/context/co/view/activityDetails/activity/bb15e3dd-cc99-4ae2-85e3-db01fdf4e790/expanded/False/tab/Instructions
