Accountants are in a position to provide advice to business owners to determine which organization structure is best for their particular business venture. Imagine that you were approached by a friend or relative interested in starting a specialty business to design men and women clothing. Discuss the advantages and disadvantages of at least two (2) forms of business structures.
Make a recommendation regarding the structure your friend or relative should use based on this particular venture. Explain your rationale.
Based on your recommendation regarding the appropriate business structure, explain the major advantages and disadvantages of the business owner with minimal accounting experience maintaining the company’s books instead of hiring an accountant. Discuss the major impact to the users of accounting statements if the statements are prepared in error. Provide support for your position. The first business structure that I would recommend, would be a partnership I would inform them that general partnerships consist of two or more partners who are both responsible for the business.
They share the assets and profits, as well as the liabilities and management responsibilities for running the business. Some benefits of general partnerships is their simplicity and flexibility. General partnerships are usually less expensive to form and require less paperwork and formalities than corporations, limited partnerships or limited liability partnerships. General partnerships can choose a centralized management structure, like a corporation, or a completely decentralized structure, where every partner is actively involved in the management of the business.
Other advantages of a general partnership are that the partners can combine resources and share the financial commitment. Some disadvantages to general partnerships, principally liability. General partners are personally liable for the business debts and liabilities. Each partner is also liable for the debts incurred by the actions of other partners. Because of this potential personal liability, general partnerships are limited in their ability to raise money and attract investors.
The second business structure that I would recommend and I think would be most beneficial to both parties would be an LLC (Limited Liability Company). A limited liability company, is a new form of business organization that is certainly worth consideration. It has several features that create favorable tax treatments, as well as protection from personal liability. Since the status of the LLC form of organization varies somewhat from state to state, be certain to find out how your state’s law applies.
Some of the advantages of an LLC are, LLC allows for an unlimited number of members however, if the LLC has just one owner, it will be taxed as a sole proprietorship. The LLC allows for the special allocation of profits the disproportionate splitting of member profits and losses in different percentages than their respective percentages of ownership. This means that members can enjoy the benefits of receiving profits and writing off losses in excess of their individual ownership percentage.
The members enjoy limited liability, which means they are personally protected from any liability of the LLC and successful judgments, as well as from the LLC itself. And just with all advantages there are always disadvantages. Each member’s pro-rata share of profits represents taxable income–whether or not a member’s share of profits is distributed to him or her. The managing member’s share of the bottom-line profit of the LLC is considered earned income, and therefore is subject to self-employment tax.
The member’s share of bottom-line profit is not considered earned income because the members are considered to be inactive owners therefore, the members do not qualify for special tax-favored “fringe benefit” treatment. As a member of an LLC, you are not allowed to pay yourself wages. I would strongly recommend going with an LLC simple because there is a lot less risk involved. There is a large percentage that businesses fail in the first year, and with that being said you don’t want to lose your business and you personal property too.