There are four main forms of business structures. The structures of business differentiate based on liability, tax implications, and what type of business is being evaluated when determining what structure to use. This paper will cover the advantages and disadvantages within the four types of business structures; Limited Liability Corporations, Corporations, Partnerships, and Sole Proprietorships. Corporations A corporation is a standalone entity. There are two types of corporations, general or S Corp.
Advantages of corporations consist of limited liability, capital through stock sales, attractive to employees, and receiving corporate tax treatment. S Corps, in addition to limited liability, have tax savings as the owners are taxed individually.
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A disadvantage of an S Corp is the limited growth as S Corps may not have greater than 100 shareholders. General corporations file taxes separately from his or her owners while S Corporations do not. Disadvantages of a corporation are time and money, large amounts of recordkeeping, and subject to double taxation.
Double taxation is taxation on the corporate level and again on a member’s personal level (“U. S. Small Business Administration,” 2013). Corporations are generally suited for large business organizations. Limited Liability Corporation (LLC) A Limited Liability Corporation (LLC) is a company combining the benefits of a partnership and a corporation. A LLC acts as its own entity with the limited liability, but also has the tax savings as if it were a sole proprietorship (“The Advantages of an LLC Company”, 2013). Advantages of an LLC are limited liability, require less paperwork, and have the ability to profit share.
Disadvantages of an LLC are limited life and members are subject to self-employment taxes. Members of an LLC are considered self-employed; therefore the individuals file taxes through personal income taxes, and pay tax contributions toward Medicare and Social Security (“U. S. Small Business Administration,” 2013). Partnerships A Partnership is a business form that consists of two or more individuals. There are two types of partnerships; general and limited. General partners are liable for the full extent of debts and obligations within the business.
Limited partnerships provide individuals with a limitation of responsibilities in the organization’s liability; this type of partnership is dependent upon the investment percentage. Advantages of partnerships consist of cost efficiency, shared financial responsibility, complementary skill association, and offer employees partnership incentives. Disadvantages of partnerships are joint and individual liability, disagreements between partners, and shared profits (“U. S. Small Business Administration,” 2013). Sole Proprietorship A Sole Proprietorship is one owner.
The advantages of a sole proprietorship exist in the simplicity of taxes, cost efficiency in the startup process, and complete control of the organization. A sole proprietorship structure is the simplest method of establishing a business, the expenses are low and fewer licensing is required. A sole proprietor is responsible for the final decisions and directions of the business. The taxes are reported through the individual at a much lower rate than any of the other structures. The disadvantages of a sole proprietorship are the personal liability risks and capital; the individual absorbs all legal implications within the business.
The difficulty of this type of business structure is the process in raising capital; the credibility of the organization can deter any potential investors. Conclusion The dynamics within each type of business structure can be applied to the needs of the organization. Each business structure has various advantages and disadvantages. A business structure should be chosen based upon the product or business and the needs and wants of the owner or owners. This paper covered what the four business structures are, and advantages and disadvantages associated.
- U.S. Small Business Administration. (2013). Retrieved from http://www.sba.gov/ The Advantages of an LLC Company. (2013). Houston Chronicle. Retrieved from http://smallbusiness.chron.com/advantages-llc-company-17263.html