Creating a Business Idea
Idea Recently the United States government has released funds for creating small businesses. An opportunity to acquire government funding for a business venture is one to take advantage of and to put dreams into reality. The intent of this paper is to outline the three main forms of business organizations including the tax and legal implications as well as the accounting requirements for each structure.
In addition, this paper proposes creating a small business of a women’s only gym while weighing in the advantages and disadvantages of the three types of business organizations which are sole proprietorship, partnership, and corporation. To start the process of forming a business there are three main forms of business organizations that a potential small business owner must choose from. Three of the main business organizations used in the market place today includes sole proprietorship, partnership, and corporation.
Deciding on a business structure appropriate for a new business will have long-term impacts and it is crucial to weigh all the choices. The following must be considered: the desired level of control, tax implications, risk of lawsuits, and the level of personal liability (Kimmel, Weygandt, & Kieso, 2009). Reviewing available options and selecting an appropriate form of business organization is the first step to creating a successful company. Before determining the preferred type of organization for the women’s gym, here is an outline of the key attributes of each form.
A sole proprietorship is a business owned by one person (Kimmel, Weygandt, & Kieso, 2009). An advantage of sole proprietorship is it is simple to establish and gives the owner control over the business (Kimmel, Weygandt, & Kieso, 2009). This is always a great advantage for someone who wants to open a business because it gives them leeway to run their business however they choose. In addition to advantages, a sole proprietorship does have its disadvantages. A sole proprietor is personally liable for debts of the business (Kimmel, Weygandt, & Kieso, 2009).
In other words, the owner is risking his or her personal assets to liquidation if the business is not successful. A partnership is owned by two or more individuals and has shared control over the business (Kimmel, Weygandt, & Kieso, 2009). This is a great advantage because partners can bring their own unique skills and resources into the business. The partners should formalize their duties and contributions in a written partnership agreement (Kimmel, Weygandt, & Kieso, 2009). This agreement states who does what in the business and also how much money each of the partners put into the new business.
It is sometimes common for one partner to put in more money than the other as well. Like a sole proprietorship, all partners are personally liable for debts of the business (Kimmel, Weygandt, & Kieso, 2009). If the business is not successful then the partners are liable for the money or assets they put into the partnership agreement. A corporation is much different than a sole proprietorship and partnership. A corporation is a business organized as a separate legal entity owned by stockholders (Kimmel, Weygandt, & Kieso, 2009).
An investor in a corporation would receive shares of stock to indicate ownership in the company (Kimmel, Weygandt, & Kieso, 2009). This means that the investors are stockholders in the corporation and own part of the company. An advantage of a corporation business organization is that buying stock is often more attractive than investing in a partnership because shares of stock are easy to sell or easy to transfer ownership (Kimmel, Weygandt, & Kieso, 2009). Therefore, it is easier for corporations to raise funds and become more successful in the end (Kimmel, Weygandt, & Kieso, 2009).
A corporation has no personal liability but it does have some disadvantages when it comes to taxes and legal implications. It is important for a small business, no matter what the business organization, to communicate with its internal and external users. Creditors, investors, and management need to know what the business owes and owns and looks at the business’ four different financial statements which are the balance sheet, income statement, retained earnings statement, and statement of cash flows.
These four financial statements are considered the backbone of financial accounting and show special significance, but ultimately, each has one common goal: to show internal and external users where the money is in the company. No matter what form of business organization the small business is they all need to prepare these four financial statements. The income statement deals with the revenues and expenses a company incurs for a period of time (Kimmel, Weygandt, & Kieso, 2009). This financial statement reports the success or failure of the company’s operating and non-operating activities.
The retained earnings statement shows the amounts and causes of changes in retained earnings during the period (Kimmel, Weygandt, & Kieso, 2009). This statement brings together the beginning and ending retained earnings for the period, using information such as net income from the company’s other financial statements. A company’s balance sheet reports assets and claims to assets at a specific point in time (Kimmel, Weygandt, & Kieso, 2009). In other words, the balance sheet summarizes a company’s assets, liabilities, and stockholder’s equity.
These three segments give investors, creditors, and managers an idea as to what the company owns and owes, as well as the amount invested by the shareholders. The balance sheet must, and always, follow the following formula: Assets = Liabilities + Stockholder’s Equity (Kimmel, Weygandt, & Kieso, 2009). The fourth and final financial statement is the statement of cash flows. This is used to provide financial information about the cash receipts and cash payments of a business for a specific period of time (Kimmel, Weygandt, & Kieso, 2009).
Cash flow is determined by looking at three components by which cash enters and leaves a company through their operating, investing, and financing activities. No matter what type of business organization or how big or small the business is it needs to have all four of these financial statements prepared for investors, creditors, and management. The following consequences associated with each form of business organization are tax and legal implications and accounting implications such as the Sarbanes-Oxley Act (SOX) and the Financial Accounting Standards Board (FASB).
These factors need to be greatly considered when deciding which organizational form to choose. If someone chooses sole proprietorship or partnership, they generally receive more favorable tax treatment than a corporation (Kimmel, Weygandt, & Kieso, 2009). However, repeated again proprietors and partners are personally liable for all debts of the business; corporate stockholders are not (Kimmel, Weygandt, & Kieso, 2009). It is important and ethical that every business is honest in their financial statements to investors, creditors, and their stakeholders.
In 2002 Congress passes the Sarbanes-Oxley Act (SOX) to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals (Kimmel, Weygandt, & Kieso, 2009). This act prevents businesses from embellishing on what they own or owe on their financial statements and to give investors more confidence in corporate accounting. In 1973, FASB was established to create and improve standards of financial accounting and reporting that foster financial reporting by nongovernmental entities that provides decision-useful information to investors and other users of financial reports (Financial Accounting Standards Board, 2012).
To accomplish the mission, the application of comprehensive and independent processes encourages broad participation, objectively deem to all stakeholders’ views, and focus on the oversight by the Financial Accounting Foundation’s Board of Trustees (Financial Accounting Standards Board, 2012). These standards are very important to the efficient functioning of the economy and internationally. Having more and more businesses be international only intensifies the importance of SOX and FASB to have international comparability with all financial statements.
The hypothetical small business will be a women’s only gym. This gym will be a safe haven for all women who are self conscious or just feel more comfortable exercising in a gym where there are no men around. In this women only gym, they would be more likely to give and receive open advice on their health condition and their workout plan. With women trainers, females could likely get better advice as well as have options for activities that may not be available in co-ed gyms.
The overall goal of this women only gym is to allow females to exercise in a safe and non stereotypical environment to help them have healthy lives. The choice of business organization form for this gym is a partnership. The reason for this is to allow two or more people, women of course, to be involved in this business adventure and put forth their own unique skills and resources. There is no need for this company to be a corporation because it is meant to be operated in a small town and the partners of this women only gym will have enough money to start it up without stockholders.
Many future business owners jump into decisions without proper deliberation and research. If you do not consider the benefits and liabilities of each business form it can be costly. There are many risks and factors in starting a business but if the owner knows the capital requirements of the business, government restrictions, and personal liability then they will most likely choose the right business form to help their business expand and be successful in the future.