January 30, 2012
Small Business Idea
Starting a small business can be daunting, exciting, and rewarding. A proprietor must consider which form of business organization is best suited for his or her product or service. There has to be consideration with legal, tax, accounting, and other implications when selecting from the four business types. This paper will explore the advantages and disadvantages of sole proprietorship, corporation, and partnership. This paper will attempt to discuss account financial statements applicable to various forms of business, consequences associated with each form of business (e.g. legal and tax implications, and accounting implications, such as SOX/FASB). A brief synopsis of a unique small business idea will be discussed along with one’s personal rationale for choosing one form of business in lieu of other forms of business. Forms of Business (Advantages and Disadvantages)
According to Cheeseman (2010), “Sole proprietorship is the simplest form of business organization. The owner of the business, the sole proprietor, is the business. There is no separate legal entity. Sole proprietorships are the most common form of business organization in the United States. Many small businesses—and a few large ones—operate in this way,” (p. 543).
The major advantages to operating a business as a sole proprietorship are fourfold and include the following: (1) forming a sole proprietorship is easy and less costly, (2) the owner has the right to make all management decisions concerning the business, including those involving hiring and firing employees, (3) the sole proprietor owns all of the business and has the right to receive all of the business’s profits, (4) sole proprietorship can be easily transferred or sold if and when the owner desires to do so; no other approval (such as from partners or shareholders) is necessary. There are important disadvantages to this business form, for example, the sole proprietor’s access to the capital is limited to personal funds plus any loans he or she can obtain, and the sole proprietor is legally responsible for the business’s contracts. Moreover, the sole proprietor is legally responsible for the business’s contracts and the torts he or she or any of his or her employees commit in the course of employment. While sole proprietorships are advantageous, “Partnerships often are formed because one individual does not have enough economic resources to initiate or expand the business. Sometimes partners bring unique skills or resources to the partnership,” (Kimmel and Weygandt et al., 2009, p. 4). Forming a corporation may foster bureaucracy and red tape involving strict guidelines with accounting and reporting standards imposed by the government (e.g. Sarbanes Oxley Act). While a business (or corporation) is organized as a separate legal entity owned by stockholders, thus alleviating partners from any and all individual liability.
It offers an investor in corporation shares of stock to indicate ownership claim. Nonetheless, buying stock in a corporation is often more attractive than investing in a partnership because shares of stock are easy to sell (transfer ownership). The advantages are coupled by the parties who own the business may sell a proprietorship or partnership interest; where as all responsibility with liquidating assets may rest solely on the shoulders of the sole proprietor. Also, individuals can become stockholders by investing relatively small amounts of money. Therefore, it is easier for corporations to raise funds in comparison to sole proprietors trying to gain capital by securing loans or borrowing money.
The disadvantages of partners and corporations are twofold: (1) you pay higher taxes, (2) all actions, such as dissolving partnerships are regulated and have to conform to strict federal and state guidelines. Tax Implications
Cheeseman (2009) implies: “A sole...