One of the many challenges that entrepreneurs face when starting a company is what type of business organization to start. There are three legal forms of owning a business each with its fair share of advantages and disadvantages. As an entrepreneur with a lifelong dream of owning and starting a company, the three forms options are available to me and I will look at the advantages and disadvantages of each both from a legal and accounting perspective before finally deciding which one to settle for.
The first and easiest form of business to form is a sole proprietorship. It is the easiest to open requiring just a business license to run which leads to savings in incorporation costs. The sole proprietorship is owned by an individual meaning that in this case, I would get to share the profits entirely by myself. The owner is also not required to maintain proper books of account or do audits, meaning that the running of the business is rather private without many legal considerations. Despite these advantages, sole proprietorships are risky undertakings since the liability is unlimited and the owners are thus responsible for all debts of the company. Owners also have a disadvantage raising additional funds and will usually rely on retained profits or personal savings. The taxes on sole proprietorships are, however, lower than for the other forms as the owner pays self-employment tax.
The next type of business undertaking is a partnership that is owned by two or more people, which may be a put off for a person who wants sole control. Although they are also easy to form, they require the owners to develop a partnership agreement that details how the profit-sharing ratio. Due to many owners, the ability to raise funds is amplified, but so is the possibility of disagreements between partners. Additionally, even though partners benefit from the complementary abilities of others, some partners may tend to take advantage of others. Despite these benefits, partnerships have more stringent legal requirements than sole proprietorships as they are required to file tax returns. The partners are also liable for all debts of the company. The partnership is also likely to dissolve in the instance of the death of a partner and profits have to be shared among the partners.
The last type of business corporation is a limited liability company called so because the owner’s personal assets are protected from financial liability unless there are mitigating circumstances. One is required to file articles of organization as well as other documents such as the profit-sharing ratio and owner’s interests. Incorporation, however, requires the payment of some fees. The business life is set out in the articles of incorporation although the limit can be continued if the members vote so. The LLC may also elect to be taxed as a sole proprietorship, partnership, or a corporation The LLC is, however, owned by two or more people which not only dilutes profits but also reduces control.
In choosing which type of business organization to pick, a few elements of my business come into play. Chief among them is the fact that I do not wish to co-own the business as this would require looking for a trustworthy partner who has funds to put into the business. Secondly, the bakery is a low-risk business which does not require separation of risk from the owner or the filing of separate tax returns. Considering that I also have considerable capital with which to start and grow my business, I consider the sole proprietorship as the most viable type of organization for my bakery.