When stating up a business, there are many different business models that can be chosen. Some of the most popular models are: Sole Proprietorship, Partnership, Limited Liability Partnership, Limited Liability Company, S Corporation, C Corporation and Franchise. When deciding which business model is most appropriate, there are two major elements to consider: taxation and liability. Each of the above business models has advantages and disadvantages in these two areas. This paper will discuss the pros and cons of each business model and provide a scenario that illustrates when a particular model would best be utilized.
In simple terms, sole ...view middle of the document...
Additionally, access to capital is limited to the owner’s personal funds and any personal loans that can be obtained.
A perfect scenario for a sole proprietorship would be a person who wanted to start up a small business mowing lawns in their neighborhood. This would be a simple business with one owner/employee. A sole proprietorship would work well in this situation as the owner would be heavily involved in all aspects of the business. Additionally, liability risk would be minimal based on the nature of the business.
A partnership consists of two or more persons who come together to run a business. There are two kinds of business partners, general partners and limited partners. General partners are equal partners and they share equally in the company’s profits and losses along with the management of the company. Limited partners are known as silent partners who provide capital for the business and share the profits, but they have no control over the operations of the business (everymanbusiness, 2011).
Business partnerships have benefits over sole proprietorships in that the work burden is shared among the partners. In the case of general partnerships, profits and losses are shared equally by the partners. In the case of limited liability partnerships, usually there exists at least one general partner who is financially responsible for the business, while the limited partners are only responsible for the business up to the amount of capital they have invested. Just like sole proprietorships, profits and losses are reported on the partner’s income tax.
The one major downside to partnerships is that the general partners are liable for all expenses of the business, similar to a sole proprietor. If a lawsuit is filed against the business, and the plaintiff wins the lawsuit, the general partner’s personal assets can be taken by the court to satisfy the lawsuit. Limited partners are shielded from liability as they are only responsible for the amount of capital they have invested.
A situation where a partnership would be a good business model would be if two individuals in town decided they wanted to start up a lawn mowing business. The two could partner up to create a business where they would be both the owners and the employees. Liability risk would be small due to the business environment and the fact that the owners would also be the employees.
Limited Liability Company (LLC)
An LLC is a relatively new type of business structure that combines the benefits of reduced taxes found in partnerships and sole proprietorships with the limited liability found in corporations. LLCs are similar in nature to limited liability partnerships.
Owners of an LLC are not liable for the debts of the company, as is the case with sole proprietorships and general partnerships. The personal assets of LLC owners are safe, even if the company operates in...