There are advantages and disadvantages to the various ways to structure a business. One of the first steps in making an entrepreneurial business opportunity a reality is deciding which form to select (Hirsh, Peters, & Sheppard. 2005). One may select a sole proprietorship, partnership, Corporation, or limited liability company depending on the criteria most important for the new owner. Some options offer advantages, weighed against other options disadvantages.
Sole proprietorships have the advantage of being the simplest form of business structure (Klein, 2006). Ideally, this form of business suits the individual who alone takes on all decisions and responsibilities. A sole proprietor is eligible for all the profits after paying expenses. One must understand however that when assuming all responsibility of the business that also entails all the liability.
Partnerships are form of business with greater than one owner (Kershaw, 2009). Each owner, or partner, shares in the decision making and responsibilities. Partners also share in the losses or profits. A partnership may be advantageous to a corporation for tax purposes. Taxes in a partnership are not paid before distribution, but are paid by the individual owner at his or her personal rate. A partnership does expose each owner to greater personal liability than a shareholder of a corporation.
Corporations are business forms where the business is set up as a separate entity from the individual owners (Kershaw, 2009). Owners are employed by the corporation, and make decisions for the entity. Employees may or may not be owners of shares, or parts of the corporation. Income generated beyond operating expenses is taxed at a corporate rate. Any remaining monies are taxed as dividends as they are paid to the shareholders of corporation. Corporations are advantageous to sole proprietorships and partnerships as they personal protection or limited liability from financial loss if the business fails.
Limited liability companies are a mix of sole proprietorships, partnerships, and corporations (Kershaw, 2009). The owners of a limited liability company are not partners, but rather members of the business. Owners are not personally liable for the debts of the company, but may be held accountable if purposefully misrepresentation or fraud is committed. Another disadvantage of a limited liability company is that owners must publicly disclose certain accounting information that would be protected if the company were a straight partnership or sole proprietorship
The most appropriate form of ownership for an aggressive entrepreneurial firm would be that of a limited liability company. A new aggressive venture, likely will be taking risks that an established firm would not take. An owner would not want to risk personal wealth on a venture that had a risk of failure (Kershaw, 2009). By establishing the business as a limited liability company, the owner or owners, would limit their personal losses.
Many risks exist for one operating a business. From start-up to regular operation countless obstacles and rewards to personal finance and personal liability exist. By knowing the nuances of sole proprietorships, partnerships, corporations, and limited liability companies one can make an informed decision about what business structure best suits his or her needs.
References Hirsh, R.D., Peters, M.P., Sheppard, D.A. (2005). Entrepreneurship (6th ed.). New York, NY: McGraw-Hill Ingram. Kershaw, D. “limited liability partnerships” the new Oxford Companion to Law. By Peter Cane and Joanne Conaghan. Oxford University Press Inc. Oxford University Press. Apollo Group. 16 November, 2009. Klein, K. E. (7/28/2006). Street smarts for vendors. Businessweek. P. 18.