Choosing the Right Business Structure: Importance and Types

Introduction

The type of business structure developed is important as it will determine how work will be distributed among the participants and the type of communication to use so as to enhance profitability of the organization. In addition, the type of structure chosen will also determine the type of income tax to be paid. When people are developing plans to start a business, various factors need to be considered and this does not only concern the physical location of a business but also the type of business structure.

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There are different types of business structure. Some of the major forms include: sole proprietorship, partnership, limited liability companies and corporations. For the mentioned business scenario where my brother and I wish to start a business together making craft items and selling them on the internet, a partnership form of business structure will be most appropriate because it is only my brother and me involved in the operations.

Proposed business structure

General partnership

There are different forms of partnerships namely, general partnerships, limited partnerships and joint ventures. A general partnership entails two or more people engaged in running a business together where profits and losses will be shared equally (Spadaccini, 2007). In this form of business structure, the business and its owners are considered as one entity. This means that when the business is faced by various risks, everyone will be held accountable for damages.

An agreement needs to be signed so as to make this arrangement legal and not just a family affair because we are related. This will ensure that we can make strategic business decisions, how the profits will be shared, conflicts dealt with and how the business will be resolved. Partnership arrangements are beneficial because, the business is easy to establish and this will give us enough time to concentrate in other aspects of the business formation.

Capital will be easier to generate as all of us will contribute equally or as per the agreed standards in our arrangement (Spadaccini, 2007). In addition, because we are skilled in making crafted items, we will benefit more from generation of good designs by specializing in this area.

Some of the factors that have been used to show that the general partnership is the best business structure option are:

• Tax minimization

Taxes are extra expenses to a business and that is why organizations always plan to keep these costs minimal. Sole proprietors are usually taxed in accordance to the income they receive. If they do not make profits, then they will be taxed less but if the profits are high, there is a probability that the tax rates will be higher. Partnerships are formed when two or more people decide to run a business together.

This therefore means that their tax costs will be distributed among the partners. The same goes for corporations. It will help to calculate the costs that will be incurred in various business structures so as to tell which will benefit the business the most. This will help in determining the expected profits and loss of the business or whether the profits need to be ploughed back into the business.

• Establishment fees and maintenance costs

Since we are starting a business to make and sell craft items via the internet, it is important to look at how much capital will be needed to start up the business. This will be important in determining the amount that each member will have to contribute; if necessary.  Certain costs are needed for registering companies especially with corporations and companies.

• Asset protection

Protecting the business against possible risks it can face is a necessary precaution. If a business is run solely, the owner can be sued if they default in payments as they have unlimited liability. Partnerships are also unlimited where the other party can be affected when one party does not fulfill their end of the deal. There are exceptions when they become limited. A company enhances the rights of its owners as the personal assets are not included in the business. No structure is completely safe. All these structures have various challenges when it comes to protection therefore it is necessary that the business owners insure their businesses against such risks.

Partnerships need to operate with written agreements to further safeguard the business. This is because they are prone to various conflicts because they are easily formed (Spadaccini, 2007). Our craft business will need to be protected from potential harm and legal issues that can arise in the business. We will require consulting a legal practitioner to assist in the formation of the business as well as to give us advice.

• Type of business

The nature of business the owners want to engage in will also determine their business structure. The first thing to look at is the kinds of products or services that are being offered. In this case, we will be dealing with craft items and selling them over the internet. Another thing to consider is whether the business operations are large or small scale. This will help in eliminating the structures that will cost the business of money when they will gain nothing in terms of revenue. If people want to share risks that face organizations, it is good for them to set up partnership arrangements.

All these factors are important as they will help us in determining the structure that will enable us to achieve the goals and objectives we have set for ourselves. Moreover the various risks that are involved in the business and this will make us more cautious and determined so as to avoid them. This will enhance the progress of the business as well as our profitability.

Reference

Spadaccini, M. (2007). Business Structures: How to Form a: Corporation, LLC, Partnership, Sole Proprietorship. Entrepreneur Press, pp. 6, 38

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