Factors Considered In Deciding the Form of Legal Business Entity
When starting a new business, it is very important to decide the form of legal entity which may be appropriate based on a number of factors. The legal entity can be sole proprietorship, partnerships (general and limited liability partnerships), limited liability companies, or corporations. One of the most important factors to consider when deciding the appropriate form of legal business entity is complexity. If one has limited capital and wishes to start a simple business unit, then sole proprietorship is the most appropriate. The second factor is the need for protection from the risk of liabilities. If the new business operates in a volatile industry where it is possible to experience huge financial losses, then a limited liability company or partnership can be considered appropriate. The ease of formation is another factor. It is easy to form a sole proprietorship as opposed to other forms of businesses. The issue of taxation may also influence the form of business entity that a person or group of people may choose. The aim is always to minimize tax as much as possible. According to Chiappinelli (2006), another important factor that should always be considered is the ease with which capital can be raised. It is easier to raise capital in limited liability companies or in corporations than it is in sole proprietorship.
i. Taxation of various forms of business entity
In sole proprietorship, the business entity
Some of the benefits of a Limited Liability Company are that as a Limited Liability Company it limits the owner of personal liability for business actions. The members are liable, but normally just to the amount of their share in the business. Their individual assets are not considered for resolving business debts. The fact that your personal assets are protected is a great benefit. Whereas, operating under a partnership all members are individually accountable for the company’s debt. In comparing the differences between a
This is the type of business entity that the owner should adopt because it is the most common and since this is the owners first time he should choose this type of entity in my opinion.
The last business option that will be discussed is the Corporation. A Corporation is “a fictitious legal entity that is created according to statutory requirements” (Cheeseman 478). The biggest advantage of a corporation is the protection of personal assets. Shareholders, directors and officers are typically not liable for the company’s debts and obligations. This is limited to the amount of money they have invested into the corporation. Since the corporation is separate from the owners, transfer of ownership is an easy task. Also corporations are generally taxed at a lower rate than individuals in the United States. A corporation is not as simple to form or maintain as other business formations. Articles of incorporation must be filed with the secretary of state and an organizational meeting must be held to elect a board of directors. A corporation also requires, at the least, an annual report so that creditors that do business with the corporation can determine the creditworthiness of the corporation. Also the corporation is taxed on its profits
A Limited Liability Company (LLC), as the name states, has the ability in keeping your liability limited as a professional owner. This is fundamental in protecting your personal assets by separating them from your business assets. In choosing to run a LLC company, we have agreed that a manager-managed business would be conducive to our field of industry. Although one person will have the authority in overseeing the daily tasks of running the business, all non-managing members will still have an input in all decisions in regards to the enterprise. Contract negotiations and employment are just a few of the joint duties of all members. Running an LLC has many advantages like flexibility, limited liability in business related debts, pass-through taxes, and reliability standing. However, with perks there are always some downfalls, such disadvantages consists of being subjected to self-employment tax or if a member departs the LLC ceases to exist, although an Operating Agreement can reverse this challenge. As you can see, running an LLC has more pros, out weighing the cons of such companies.
Proprietorships have three advantages: they are easy and inexpensive to form, subject to few regulations, and no corporate income taxes. The disadvantages are difficult to raise capital, unlimited liability and limited life. Partnership are similar to proprietorships in that they can be stablished relatively easily and inexpensively. The partners are generally subject to unlimited personal liability, this makes it difficult for partnerships to raise large amount of capital. Corporation also have unlimited lives, and easy transfer of ownership, limited liability and ease of raising capital to operate larger businesses. The disadvantages are double taxation, the corporation’s earnings are taxed; and then when its after-tax earnings are paid out as dividends, those earnings are taxed again as personal income to the stockholders. Limited liability reduces the risks endure by investors; and other things held constant, the lower the firm’s risk, the higher its
Before you ;can open the doors to your new business, you will need to choose a business entity. This will be your identity for tax and other legal purposes. The entity that you choose will determine how you are taxed, how much liability you have, and how you have to keep your records throughout the year. Your business entity will also dictate how large your business will be able to grow, if you can have investors, and how you will be viewed by the global market.
4. Government. You need to submit paperwork to form a business entity, you should probably get at least one or more licenses or license, you must be careful to avoid all
The choice of legal status for setting up a new company can be complex and is dependant on various tax, commercial and legal considerations (Accountingweb, 2014).
If I start a new business in future, I will use the name with my last name "Luitel's Corporation". My business will be the family based business where every member would be able to work in a team. After searching business name, the Secretary of State website allows us to file a form. There are lots of option of selection regarding businesses such as non-profit, profit oriented, limited liability and more. The selection process goes through entity name, Article of Incorporation, and more. I have selected profit corporation because my goal of operating any business is to earn money. I have selected profit organization. The secretary of State helped us to incorporate any business in legally. Most of the people things commencing a business is a lengthy process. After going through all the process I realized we can start business
Numerous large businesses that are operating today were once started as small businesses. A new business is established to create a good or service that no other businesses have ever created or simply a product of higher quality than existing products, with the purpose of meeting customers’ needs and earning profits. Due to the technological advances at the present time, starting and operating a new business is less laborious. Nevertheless, would-be entrepreneurs should be familiar with the proper approaches to start their businesses.
Legal Structure of a Business Orgnanisation Business organisations are the different legal forms a business can adopt. The key distinction is that some businesses provide limited liability for any debts the business incurs. Others have unlimited liability - which obviously doesn't [IMAGE]Unincorporated Incorporated Up Arrow Callout: Sole-trader Up Arrow Callout: Partnership Up Arrow Callout: Private Limited Company (ltd)
As with any kind of business formation, there will always be, to some extent, negative aspects associated with the creation. To this date there is no perfect form of business entity. When deciding on which entity is best suited for a business, there are many things to be considered. Prior to deciding on a business structure, some major points to be thought about are both the legal and tax ramifications associated with the entity chosen. Another criteria that should be considered are the costs connected with the entity type. These cost include the cost of formation as well as any continuing administrative cost that may be incurred. (“Choose Your Business,” 2011)
Firstly, even though there are different types of partnership such as general, limited and limited liability partnership. This three different type has its advantages and disadvantages however we will be mainly focused on general partnership. One advantage of the general partnership is raising capital due to the nature of the business the partners will raise capital to start-up the business. Therefore more partners mean more capital can be put to the business, this allows the business to have more potential for growth and profitability. Another advantage is that a partnership is less complicated to form and run than a company they don’t have legal filing requirements, this means they don’t have to file accounts and documents with Companies House.
Those legal structures are: sole trader,partnership,partnership with limited liability(LLP),private limited company (LtD) and public limited company (PLC).