Starting a business involves a large amount of planning. Part of this planning is determining what type of business structure is the proper structure for the business. There are several types of business structures. The purpose of this paper is to identify the different business structures, and to explain how each business structure may and might not be advantageous. Business Structures There are three different types of business structures. The first type of business structure is a sole proprietorship structure.
The second type of business structure is a partnership structure and the third type of business structure is a corporation structure. Sole Proprietorship In the sole proprietorship structure an individual owns and operates the business. The sole proprietorship structure is the easiest legal structure to engage in when starting a business. Because the fees to obtain a business name and certificate are minimal a sole proprietorship is an inexpensive way to begin a business.
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An individual who prefers complete authority with the business decisions and is limited on funds a sole proprietorship is the ideal structure.
The results are that the earnings are taxed only once and can be taxed as personal income. The disadvantages of the sole proprietorship structure are that the individual is liable for everything. This includes the company’s financial status. Another disadvantage is that it is hard to receive financial backing for a sole proprietorship structured business. Partnership Another business structure is the partnership structure. In a partnership structure the ownership and operation of the business is between several people.
There are two types of partnerships, general, and limited. A general partnership can be a written agreement between two or more people and a limited partnership will limit the liability of each partner according to their capital investment. A partnership structure requires trust and support between the partners. Tax benefits are the advantages for a partnership structure as well as sharing of financial and operational aspects of the business. The disadvantage of the partnership structure is the risk of personal liabilities and expenses. Corporation
The corporation structure has multiple owners and operators and is complex and expensive. There are different types of structures to the corporation structure. The first is general corporations. The most common is the general corporation. The company is a separate legal entity, owned by stockholders. The number of stockholders are limited, and they protected by business predators (university of Phoenix, 2013). The advantages to a general corporation are the ability to make loans and that personal assets are protected from business debt or liability.
The disadvantages of the general corporation are that it is a difficult corporation and this type of corporation requires the assistance of an attorney. The next corporation structure is the Subchapter S corporation structure. Small business owners mostly use the Subchapter S corporation structure. The advantages of the Subchapter S corporation structure are tax savings, business expense tax credit, and the ability to separate an independent life from shareholders (University of Phoenix, 2013). The disadvantages are shareholders compensations requirements and a stricter operational process.
Finally there is the limited liability company LLC. The limited liability company is not a corporation, but offers advantages similar to the Subchapter S corporation structure. The limited liability company has fewer ownership restrictions as the Subchapter S corporation structure and has more flexibility for managing the business. The limited liability company is easy to obtain and has some protection. The disadvantages of the limited liability company are taxes, minimum required number of owners, and state availability.
Conclusion When making the decision on opening a business an individual must take into consideration the type of business structure that best fits his or her company. When making the decision of which business structure is best to use it is important to look at the meaning of the business structure, the advantages of the business structure, and the disadvantages of the business structure. This paper defined the different business structures and explained explain how each business structure might and might not be advantageous.