Question

Competency

Evaluate the different types of business entities.

Instructions

You are a new consultant at T&G consulting firm. T&G has training to prepare new colleagues for consulting with business clients who want to start new businesses. Parts of the training you are already familiar with—sole proprietorships, partnerships, corporations, limited liability companies, and how to evaluate different business entities. To better understand your own perspective, there is a self-reflective questionnaire as part of the training.

For this questionnaire, reflect on and address the following items. Consider presenting the information from this first section in a table.

Out of the general category of choosing a business entity (sole proprietorships, partnerships, corporations, limited liability companies):

Describe the basic features of sole proprietorships, partnerships, corporations, and LLCs.

Explain what you think is the most important feature of each business entity.

Compare the advantages and disadvantages of each type of business entity.

Starting a new business involves many considerations and decisions. Please answer the following questions in a paragraph for each:

What are the potential risks or starting a new business? State 3-5 risks.

What questions should you ask to determine how the business should be formed?

How do the number of owners influence how the business should be formed? Please explain.

How do financial considerations influence the decision for how the business should be formed? Please explain.

Answer 1

Describing Features and advantages & Disadvantages of diff. kind of entities:

Proprietorships

Advantages of proprietorships Are:

1) Easy Setup

Easy setup is one of the main characteristics of a sole proprietorship. Independent business entities, such as corporations and LLCs, must file business formation paperwork with a state agency before operating. Drafting the paperwork, filing it and receiving approval from the government can take weeks and cost hundreds of dollars.

2) Unlimited Liability

Another primary characteristic of a sole proprietorship is the unlimited personal responsibility of the owner. One of the caveats of not having to file business registration paperwork with most states is that the owner takes full responsibility for anything that happens regarding the business. If the business cannot pay its bills, for example, creditors can come after the personal assets of the owner, including the owner’s house and family bank accounts.

3) Management

By legal definition, a sole proprietorship can have only one owner. This characteristic means that the buck starts and stops with the owner.

4) Income Taxes

A sole proprietorship is distinct in the way the owner pays federal taxes on business income.

List of Disadvantages of Sole Proprietorship

1. Personal and Business Assets
One of the drawbacks of sole proprietorship is that the owner’s money is tied to his business in the sense that finances of the owner and the business are one and the same and that there is no legal separation between the two.

2. Less Capital
The flipside of not having partners or other investors in a business is not being able to come up with a large amount of capital to start and sustain the company. Even if the business idea is feasible and looks lucrative, coming up with a substantial amount of money to get the business going can be difficult after some time if there is no additional capital.

3. Decision-Making
Being the only one to make decisions has its advantages and disadvantages. If problems encountered are complex, it helps to brainstorm with like-minded people whose interest centers on making the business profitable.

4. Work Life Balance
Sole owners of businesses often find it hard to go on vacations since they have to look over the company. This can be a setback since their personal life and family can suffer because of too much work and pressure running the company.

Partnership Firms

Basic features of sole Partnership Firms Are:

1. More Persons:

As against proprietorship, there should be at least two persons subject to a maximum of ten persons for banking business and twenty for non-banking business to form a partnership firm.

2. Profit and Loss Sharing:

There is an agreement among the partners to share the profits earned and losses incurred in partnership business.

3. Contractual Relationship:

Partnership is formed by an agreement-oral or written-among the partners.

4. Existence of Lawful Business:

Partnership is formed to carry on some lawful business and share its profits or losses. If the purpose is to carry some charitable works, for example, it is not regarded as partnership.

Basic Advantages of partnerships Are:

1) Existence of business

The objective of partnership must be to do some type of business. Business here means any activity leading to earn profit persons joining together and agreed to do charitable work or for formation of any club for entertainment would not be treated as partnership due to absence of the business.

2) Numbers of persons

There must be at least two or more persons to form a partnership firm. As per Indian partnership Act, the minimum number of person required is to buy it does not prescribe the maximum limit for the purpose.

3) Contractual relationship

There should be a contractual relationship between the persons forming partnership. Persons competent to contract can be partners.

4)Sharing of Profits

Business is carried on to share profit and not to incur losses. The profits generated by the firm are to bestaned among the partners on an agreeable proportion. Loss it any has also to be borne by them on that ratio.

Descriptions of these drawbacks/ disadvantages are as follows:

1. Unlimited Liability:

In partnership firm, the liability of partners is unlimited. Just as in proprietorship, the partners’ personal assets may be at risk if the business cannot pay its debts.

2. Divided Authority:

Sometimes the earlier stated maxim of two heads better than one may turn into “too many cooks spoil the broth.” Each partner can discharge his responsibilities in his concerned individual area. But, in case of areas like policy formulation for the whole enterprise, there are chances for conflicts between the partners. Disagreements between the partners over enterprise matters have destroyed many a partnership.

3. Lack of Continuity:

Death or withdrawal of one partner causes the partnership to come to an end. So, there remains uncertainty in continuity of partnership.

4. Risk of Implied Authority:

Each partner is an agent for the partnership business. Hence, the decisions made by him bind all the partners. At times, an incompetent partner may lend the firm into difficulties by taking wrong decisions. Risk involved in decisions taken by one partner is to be borne by other partners also. Choosing a business partner is, therefore, much like choosing a marriage mate life partner.

corporations

Basic features of corporations Are:

1) Unlimited life

As a corporation is owned by stockholders and managed by employees, the sale of stock, death of a stockholder, or inability of an employee to function does not impact the continuous life of the corporation.

2) Limited liability

The liability of stockholders is limited to the amount each has invested in the corporation. Personal assets of stockholders are not available to creditors or lenders seeking payment of amounts owed by the corporation.

3) Separate legal entity

The corporation is considered a separate legal entity, conducting business in its own name. Therefore, corporations may own property, enter into binding contracts, borrow money, sue and be sued, and pay taxes.

4) Ease of capital acquisition

A corporation can obtain capital by selling stock or bonds. This gives a corporation a larger pool of resources because it is not limited to the resources of a small number of individuals.

Disadvantages of Corporations

1) Double taxation of corporation profits.

The corporation pays federal and state taxes on its profits. When dividends are paid to shareholders, they are treated as income and taxed again.

2) Forming a corporation costs more.

Attorneys charge more to form a corporation.

3) States have higher fees.

States charge annual franchise fees for corporations.

4) More state and federal regulations and oversight.

Tax filings are more complicated for corporations. States require the filing of Articles of Incorporation, corporate bylaws and annual reports. Corporations must designate a board of directors and hold annual meetings.

Basic features of LLCs Are:

1) Function

The function of a limited liability company is to provide business owners with protection from personal liability for the activities of a business. In this way, a limited liability is like a corporation.

2) Creation

A limited liability company is created by filing articles of organization in the state where the business is headquartered. The secretary of state provides a standard form for this purpose.

3) Misconceptions

A common misconception associated with a limited liability company centers on paperwork and record keeping. For example, unlike corporations, minutes of the meetings of the members of a limited liability company do not need to be taken or maintained. A corporation must maintain these types of records or run the risk of losing its legal authority.

4) Effects

One of the primary effects of establishing a limited liability company is a significant tax benefit, Unlike a corporation which must pay taxes directly, along with taxes paid by shareholders for their own profits, a limited liability company is not taxed. The tax liability passes through to the individual owners or members.

Diadvantages of LLCs:

1) Cost.

Compared to a sole proprietorship or partnership, an LLC is a little more expensive to operate. The start-up cost is only slightly more than for a corporation, but proprietorships and general partnerships do not have start-up or annual fees.

2) Taxes.

A limited liability company owner may have to pay unemployment compensation for him or herself, which he or she would not have to pay as a sole proprietor.

3) Banking.

Checks made out to a limited liability company cannot be cashed; they must be deposited into a corporate account. Some banks have higher fees just for businesses that are incorporated.

4) Separate records.

The owners of a limited liability company must be careful to keep their personal business separate from the business of the limited liability company. The limited liability company must have its own records and should have minutes of meetings. Money must be kept separate. Businesses should maintain seperate recrods and the structure of a company might make it easier to do so.

Potential risks or starting a new business

1. Product risk. Decide what you are selling. It seems like an easy thing to determine especially for an entrepreneur. But the ability to explain what your product is, the problem(s) it solves, and why it’s worth investing in is much harder than it seems and it must be your top priority when starting a business.

2. Market risk. Knowing your customer and why, how and where they buy related products is arguably the most important risk factor to assess before launching your product. Research this thoroughly. Identifying these routes to market, and whether you can build them effectively, in a timely fashion and within your budget, could easily determine the success of your business.

3. Financial risk. First-time entrepreneurs are fortunate to have tools such as Kickstarter and Indiegogo that enable crowdfunding to get money in the bank. In addition, friends and family, angel investors and traditional VCs are all fertile sources of this necessary life blood.

4. Team risk. There is no way that one person can vanquish every risk. That’s why it’s important to have a great team and a personal sounding board -- a mentor, confidante or even a startup incubator to help prepare for each challenge. Your team is also great for bouncing around ideas to build a product, bring it to market and maintain successful growth.

Determining how the business should be formed

1. What Business Are You In? What Business Are You Really In?

2. What Business Will You Be In The Future, Based On Current Trends?

3. Who Is Your Customer? Your Ideal Customer? Your Perfect Customer For What You Sell?

4. What Does Your Customer Consider As Value?

5. What Do You Do Especially Well?

6. What Are Your Goals?

7. What Are The Constraints On Your Business Today?

How do the number of owners influence how the business should be formed

1. A sole proprietorship is the most common form of business organization. It's easy to form and offers complete managerial control to the owner. It could be get in existance just with one person.
2. A partnership involves two or more people who agree to share in the profits or losses of a business.
3. A corporation is a legal entity that is created to conduct business. The corporation becomes an entity-separate from those who founded it-that handles the responsibilities of the organization.
4. A hybrid form of partnership, the limited liability company (LLC) ,is gaining in popularity because it allows owners to take advantage of the benefits of both the corporation and partnership forms of business.

How do financial considerations influence the decision for how the business should be formed:

1. Using the resources that are available to you. There are several free online resources that can help guide you through the steps of starting your own business.
2. Determining equipment needs and costs. Make a list of all the items you'll need to purchase or lease to get a true sense of your start-up and operating costs. Will you need big ticket items such as business or office space, manufacturing and computer equipment? What about smaller purchases like office supplies and software? It's beneficial to have a detailed list of your needs when making a plan and figuring out your costs.
3. Adding up the other costs you may incur. If you plan on hiring any personnel, factor in the costs of any employee benefits, such as health care or dental insurance, that you may be required to provide your employees. Also consider any wages that you'll pay and the fees for any legal, financial or tax advice or special licenses or permits if they apply to your business needs.

4. Setting up your financial accounts: After you have established the type of business entity you need, talk with your advisors about what kind of banking and credit services you may need. Shop around to see who offers the services and pricing that best meet your needs.