Question

Develop a 1,050-word evaluation describing business structure and financial statements, including the following:

• Identify and describe the legal categories of a business organization contrasting tax-related advantages and disadvantages.
• Next, using your entrepreneur skills, consider starting your own business. What business structure would you choose and why?
• Discuss financial statements for the chosen business structure, then explain with specific examples from the University Library, how these would help you make decisions about your business.

Answer 1

Four Type of Business Structure

Our form of business determines which income tax return form you have to file. The most common forms of business are a sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is a business structure allowed by state statute the easiest business structure to start off with is the sole proprietorship.

And the financial structure is the mix of short-term liabilities, short-term debt, long-term debt, and equity that a business uses to finance its assets. A significant reliance on debt funding allows shareholders to achieve a higher return on investment since there is less equity in the business.

Advantage and Disadvantage of a Sole Proprietorship

A sole proprietorship is the common business structure. It makes sense if you're in a business where personal liability is not a concern. From a legal standpoint, the owner and the proprietorship are the same.

Advantages

• It's the easiest to set up because it doesn't require the filing of any papers.
• States do not require the registration of proprietorships.
• Profits are only taxed once on the owner's personal tax returns.
• The owner has complete control of the business and makes all the decisions.
• Tax forms are not complicated.
• Assets are easy to liquidate upon the death of the owner.

Disadvantages

• The owner is exposed to unlimited legal liabilities. If you lose a lawsuit, you could lose your home, car and other personal assets.
• Proprietorships cannot accept capital from outside investors.
• Borrowing money is more difficult. Banks are reluctant to make business loans to sole proprietorships. You will have to rely on savings, home equity loans or loans from family members.
• The business will be liquidated when the owner passes away.

But, what if your business has more than one owner? A partnership could work in this case.

Advantage and Disadvantage of Partnerships

A partnership is a sole proprietorship that allows the business to have more than one owner.

Advantages

• They're easy to form.
• A partnership can bring together a group of individuals with different talents to share in the responsibilities of running a business.
• If the partnership agreement permits, a partnership could continue to exist if one of the partners dies.

Disadvantages

• Partners are exposed to unlimited liabilities.
• Owners will not always agree on decisions. This could lead to management conflicts.
• Partners share in the profits of the business, but will not always feel they are being adequately compensated for their contributions and services.

Are you concerned about the unlimited liability exposure that risks losing your personal assets in a lawsuit? The next step up is to form a limited liability company.

Advantage and Disadvantage of Limited Liability Companies

Advantages

• The owners have limited liability. The owner's personal assets are protected from judgments and defaults on company debts.
• Owners can choose how businesses pay taxes. It could be a proprietorship, a partnership or a corporation.
• Most states don't require LLCs to have annual meetings.
• An LLC is not required to have a board of directors.
• The number of shareholders is unlimited.

Disadvantages

• Legal and accounting costs are higher than proprietorships.
• LLCs must file articles of incorporation with the state of domicile.
• Owners must create an operating agreement that defines management authority and limits to making decisions.
• In some cases, an LLC will cease to exist upon the death of a member, unless otherwise specified in the operating agreement.

Suppose your business is growing and you need to attract more lenders and investors. A-C Corporation may be necessary.

Advantage and Disadvantage of C Corporations

A corporation is a legal entity that's completely separate from the shareholders who own stock in the company. It has the authority to enter into contracts and buy and sell the property. A corporation can sue other parties but can also be sued.

Advantages

• Owners do not have personal liability for the debts of the corporation. A shareholder only risks the amount of investment in the company.
• Has more access to financial resources. A corporation can sell stock to raise capital, obtain bank loans or issue bonds for long-term financing.
• Corporations are better able to attract more talented and skilled employees than proprietorships.
• The corporations continue to exist separately from the lives of their stockholders.

Disadvantages

• A-C Corp is the most complex business structure and requires a lawyer to set up.
• Earnings could be subject to double taxation.

Not thrilled with the prospect of paying taxes twice with a C Corp? An S Corp could be your solution.

Advantage and Disadvantage of S Corporations

S Corporations combine the tax benefits of proprietorships and LLCs with the liability protection of C Corps.

Advantages

• Avoids double taxation by passing income through to the owners.
• The structure of an S Corp protects the personal assets of the shareholders.
• Lenders are more willing to make loans to S Corps.

Disadvantages

• Articles of incorporation must be filed with the state.
• An S Corp is limited to 100 shareholders.
• It can only have one class of stock.
• Fringe benefits provided by the company to shareholder-employees are taxable as compensation.

The choice of which business structure to use demands thought about your type of business and what you want it to look like. If the business is just yourself, a sole proprietorship could be enough. But, if you're worried about personal liability and risking personal assets and taxes, consider an LLC, a C Corp or an S Corp. A partnership must follow generally accepted accounting principles when reporting its financial transactions and creating financial statements” (Rogers). Therefore, when a financial statement is made for a partnership, it will include a balance sheet that shows the company's liabilities, assets, and net worth. Also, it will include an income statement that shows the net income of the company. Furthermore, the partnership’s net income of each partner is reported separately on the income statement. The last thing that a financial statement has is a cash flow statement which shows the inflow and outflow of cash. Also, financial statements help with making sure fraud is not happening and an example would be double-dipping. Double dipping

Exists in bankruptcy, where a creditor has the benefit of a guarantee from a debtor entity and the primary obligor asserts an independent "incremental" claim against a debtor entity, which also ensures to that same creditor's benefit, a financial statement keeps the business on track and allows the owners to see if changes have to address.

When starting a business, there are several types of organizations to choose from which include sole proprietorship, partnership, and corporations. A sole proprietorship is a business that is owned by one person. Two or more people hold a partnership structure. Whereas a corporation is a legal entity separate from its owners which means it can enter into contracts, can sue or be sued and pays taxes. Furthermore, there are many tax-related disadvantages and advantages to each structure which plays a role in how an individual decides what type of structure they would open a business as. Also, financial statements help companies to keep track of how money comes and goes out. It enables you to keep track of assets and liabilities along with the net income of the company.