Starting a new small business can be tedious and time consuming. When starting one’s own small business it is important to know what type of business organization one wants to open and what type of business it will be. Here one can find information regarding the four types of business organization, financing statements with each type, consequences associated with each type, and the type of business that Penny Garriott and Jim Lucas want to open in the near future. Along with an explanation of the business Penny and Jim want to open there will be an inclusion of information pertaining to what type of business organization they chose and the rationale for doing so. Four Types of Business Organization
There are four basic types of business organization these are sole proprietorship, partnership, C Corporation, and S Corporation. Each has advantages and disadvantages that can help a new or potential business owner decide what type of business to open.
A sole proprietorship is an excellent concept for a small business. Income that the company makes goes either back into the company or into the owner’s pocket. This type of business is easy to start up and operate with a good business plan (Choosing the Legal Form of Ownership for Your Business, 2012). The simplicity of this type of business organization can be appealing to newcomers in the business world.
The primary disadvantage of a sole proprietorship is that all costs or debts incurred by the business are owed by the owner. Tax returns for the business are filed with the individual owner’s taxes and any taxes due are paid per the owner’s individual tax return. If the company was to have litigation brought against it or have outstanding debt personal property can be seized as a means to pay for the debt owed. Sole proprietorships also lose some tax benefits that other types of business organizations receive, though, this can vary state to state.
Partnerships have more than one owner. A partnership is similar to a sole proprietorship in that the owners and business are considered the same legal entity. This type of business organization can have property or debt in the business name though the owners are still responsible for debts. A plus to partnerships is that there are other individuals to help share costs with incurred by the business.
On the downside all revenue is spread between partners meaning less of a personal income for oneself. As well, every partner is held liable for acts done by other partners thus there is an increase in liability, which many may not want. This type of business does not pay its own taxes but instead is spread between partners. “The pro-rata share of its income and expenses are shown on each partner’s personal return . . .” (Choosing the Legal Form of Ownership for Your Business, 2012, para. 9).
Corporations can be split into two different kinds C Corporation and S Corporation. A C Corporation is akin to a partnership but without personal liability for debts incurred by the business. Corporations have shareholders who essentially pay the president and others to run the business. The primary benefit of this type of business organization is that the owner(s) and business are separate legal entities. The individual(s) who started the business can hire themselves on as president or chief financial officer and reap benefits, such as health insurance that the company pays for. The primary disadvantage is that the original owner(s) gives up primary control to shareholders. This may cause some to lose faith in their company.
S Corporations are essentially the same as a C Corporation but the IRS permits the business to be taxed as a partnership (Choosing the Legal Form of Ownership for Your Business, 2012). Most corporations start as S Corporations as profits can be minimal and shareholders may be few. One could assume that this type of business organization is disadvantageous all around....