Hypothetical Business

HYPOTHETICAL BUSINESS

HypotheticalBusiness

Whenconsidering to start a business, it is important to have anunderstanding of the different forms of business organizations.Knowledge of the different business organizations will help inselecting the best alternative. There are three forms of businessorganizations, which include partnership, sole proprietorship, andcorporations (Mann &amp Roberts, 2007). These business organizationshave different pros and cons.

Asole proprietorship is a form of business organization that comprisesof only one person running the business. This form of businessorganization has an advantage in that it has low start-up costs andoperational overheads are low (Adamson, 2012). Also, this form ofbusiness organization is easy to form and dissolve. The soleproprietorship is subject to few regulations and does not paycorporate income taxes. Despite these pros, this form of businessorganization has some cons. This business organization has unlimitedliability and limited life. Also, it can be difficult for a person toraise sufficient capital.

Apartnership is a form of business organization that comprises two ormore persons running the business. One of the pros of this businessorganization is that it is easy to form given the contributions ofthe individuals forming the business (Gage, 2004). This businessorganization has the potential of experiencing fast growth due toindividuals combining their strengths. Partnerships are also notsubject to corporate tax (Mann &amp Roberts, 2007). However, thisbusiness organization has the disadvantage in that partners may havedisputes that may affect smooth running of the business. Also, thebusiness organization has limited life.

Onthe other hand, corporations describe legal entities doing businessand are different from the persons within the entities. Corporationhas a pro in that it has unlimited commercial life. Also, acorporation has an advantage of greater flexibility in the raising ofcapital since it may solicit capital through selling stock. Besides,this business organization is beneficial since it is easy to transferownership through sale of stock (Mann &amp Roberts, 2007).Furthermore, this business organization is advantageous becauseindividual owners have limits on their individual liability. Despitethese advantages, corporation also has some disadvantages. One of thedemerits of this business organization is double taxation (Emanuel,2009). This form of business organization requires high organizationand operating costs. In addition, corporation may encounter a lot ofcosts in complying with regulations.

Theorganization model that I would prefer is a sole proprietorship. Thereason for choosing sole proprietorship is because this form ofbusiness model is easy to create. In a sole proprietorship, one cancome up with a business idea and implement the idea withoutnecessarily consulting other parties for instance, a sole proprietormay think of selling bicycles without consulting another party sincehe is his own boss. Besides, the reason for selecting thisorganization model is because few regulations are required in runningthe business and less operating cost is required (Pride et al.,2010).

Inorder to increase the business, a sole proprietor may seek a personalloan from a bank. The loan can be used in purchasing moreinventories, which would result in the expansion of the business. Forinstance, in the case of bicycles, the loan can be utilized inpurchasing more bicycles. Also, a sole proprietor may increase thebusiness through seeking donations from friends or family membersthe donations solicited from friends or relatives can be utilized inpurchasing more stock or catering for operating costs.

References

Adamson,J. E. (2012). Lawfor business and personal use.Mason, OH: South-Western Cengage Learning.

Emanuel,S. (2009). Corporations.Austin: Wolters Kluwer Law &amp Business.

Gage,D. (2004). Thepartnership charter: How to start out right with your new businesspartnership (or fix the one you`re in).New York: Basic Books.

Mann,R. and Roberts, B. (2007). Essentials of business Law and the LegalEnvironment 11th Edition. Mason, OH: South-Western Cengage Learning.

Pride,W. M., Hughes, R. J., &amp Kapoor, J. R. (2010). Business.Australia: South-Western/Cengage Learning.

Hypothetical Business

HYPOTHETICAL BUSINESS 1

HypotheticalBusiness

College

Many companiesare formed without consideration of organization structure. Suchgroups automatically assume the classification of soleproprietorships and general partnerships. However, these entitieslack legal separation between the business and its owner. Businessmodels determine the characteristics and privileges enjoyed by anindividual venture. The major classifications are corporations andlimited liability companies (LLCs) (Piper, 2012). Coca-Cola Companycan be identified as a corporation while Koch Industries is awell-known LLC.

There are twodistinct types of corporations, C and S corporations. C corporationsare the regular corporations subject to double taxation. This impliesthat the organization incurs corporate tax in addition to theindividual tax levied on the shareholders. The dividends due to theshareholders are obtained after corporate tax deductions are made onbusiness profits. On the other hand, S corporations enjoy a specialtax status with the Internal Revenue Service (IRS). They acquire sucha status after lodging applications and fulfilling certainrequirements as stipulated by the IRS (Mancuso, 2005). As such, Scorporations are legally registered under the Subchapter S of the IRSregulations.

There existseveral similarities between an LLC and a corporation. Both Coca-ColaCompany and Koch Industries provide limited liability protection totheir members and owners. This implies that liabilities and debtswould never be charged to the personal assets of the members andowners. Sole proprietorships and general partnerships notable fail tooffer this protection. Additionally, both corporations and LLCs allowthe organization to exist as separate entities from the owners(Piper, 2012). This legal separation allows the firm to conductbusiness independent from the personal failures of the owners.

As discussed, aregular corporation is subject to double taxation of its profits.However, an S corporation enjoys the same tax status as an LLC sinceit circumvents corporate tax. Both entities experience pass-throughtaxation in that profits and losses are directly applied to theowners. In this instance, individual tax takes precedence. Moreover,the filing of tax returns is mandatory for both entities especiallywhere the LLC has multiple owners. Both Koch Industries and Coca-ColaCompany must abide by state requirements such as paying registrationfees and filing annual reports (Mancuso, 2005). An LLC and a Ccorporation would both lack restriction on the number of owners andalso reduce the tax bill.

Nevertheless,there are glaring differences between corporations and LLCs. Thefirst difference concerns ownership. An LLC can have an unlimitednumber of members as owners. On the other hand, an S corporation ispermitted less than 100 shareholders. An LLC can have members fromdifferent nationalities while an S corporation should have onlyAmerican citizens as its shareholders. This restriction isimplemented due to the special tax status accorded by the IRS. An Scorporation would never be owned by other corporations while an LLCis unbounded regarding ownership (Beach &amp Seidler, 2010).Additionally, LLCs can have multiple subsidiaries while an Scorporation exists as a sole entity.

The ongoing formalities imposed on an S corporation far outweighthose of an LLC. Granted, the documents associated with an LLCpresent more difficulty in their preparation. Moreover, an LLC hashigher startup costs compared to an S corporation. Therefore, thedifficulty of preparation is offset by the relatively fewer documentsrequired for continued compliance. An LLC has a flexible managementstructure compared to a corporation (Piper, 2012). The owners of anLLC can choose to have either members or designated managers to serveas management. The former situation would make the LLC act as apartnership while the latter renders it a corporation. Where managersare appointed to provide oversight, the members relinquish controlover daily operations of the business. On the other hand, acorporation has a rigid corporate structure. The shareholders havethe mandate to appoint a board of directors which makes majordecisions and handles other corporate affairs. The board alsoappoints managers to oversee the daily operations of the business(Minnesota Continuing Legal Education, 2012). Therefore, acorporation encompasses several aspects of principal-agentrelationship. The shareholders act as the principals whereas theappointed managers serve as the agents.

A corporation hasperpetual existence whereas an LLC features a dissolution clausewithin its paperwork. An LLC risks closure in case one of the membersdies, withdraws, or suffers bankruptcy. In a corporation, the stockis easily transferable as per the ownership restrictions. Theconverse is true for an LLC. In fact, approval from the rest of themembers is needed before interest in the LLC is sold to an externalparty. An S corporation enjoys certain privileges due to consideratetaxation procedures. Owners of a corporation could choose to beconsidered as employees paying self-employment taxes. Therefore, theywould retain some of the business proceeds and award themselvesreasonable salaries with favorable taxation (Piper, 2012). Thecorporate income accrued after payment of salaries is exempt fromself-employment taxes.

The owners of anLLC are obligated to remit taxes on their profit share. Such taxesare paid regardless of whether the profits are retained in thebusiness or sent to personal accounts. However, owners of acorporation only pay individual taxes on the amount they earn asdividends. In contrast to a corporation, members of an LLC are notclassified as employees. Therefore, their share of profits is exemptfrom Medicare tax and social security. Only active workers remitself-employment taxes from both salaries and profits. In acorporation, Medicare tax and social security are levied solely onsalaries. Active workers of an LLC are allowed to deduct lossesincurred by the business from their tax returns (Fontana, 2010). Thishelps to offset their obligation by reducing their tax liability.However, a corporation’s shareholders do not exercise this right.Granted, the same restriction does not apply to S corporationshareholders.

The shareholdersof corporations enjoy plenty of benefits that are tax-allowable. Suchbenefits include employee stock purchase plans, stock options, andsome retirement plans. Both an LLC and an S corporation remit taxeson some employee benefits such as life insurance and health benefits.In an LLC, all members receive an equal share of the dividendregardless of their individual capital contribution. A standardcorporation can also set up a unique class structure of stock thatguarantees equal distribution of dividends among shareholders.Nevertheless, an S corporation can only maintain a single classstructure of stock (Minnesota Continuing Legal Education, 2012).Under this arrangement, it can issue dividends to shareholders inproportion to their relative investment into the firm.

Setting up ahypothetical business as either an LLC or an S corporation presentsparticular benefits and drawbacks for either case. An LLC affords themost flexibility and autonomy to a business owner. It also involvesless paperwork by avoiding mandatory meeting requirements establishedby the state. An LLC is ideal where equal distribution of dividendsis preferred as opposed to the comparative method (Fontana, 2010).However, setting up an S corporation would make the most sense for ahypothetical business.

An S corporationoffers the most reliable protection to a business entity. Itsafeguards the liability of the owner from the losses of thebusiness. An S corporation also provides the best chance forattracting investments. Investors usually prefer to pool theirresources into businesses that offer tax incentives. This alsoguarantees them to receive dividends commensurate with theirinvestment in the company. The corporate structure of leadership in acorporation provides adequate checks and balances against fraudulentactivities. The principal-agent relationship between the managers andthe shareholders ensures the objective of wealth maximization isrealized. The irreproachable board of directors makes sober corporatedecisions on behalf of the firm. The board also appoints qualifiedmanagers after intense vetting and deliberation (Fontana, 2010). Theboard charter also lays the groundwork for quorum and corporategovernance.

An S corporationwould also enable the hypothetical business to flourish due to thetax haven. An owner would stand to earn a salary instead ofself-employment salary. This serves to reduce the tax liability.Additionally, an S corporation makes it easy to sell and transferstock. This highlights the high potential for growth within an Scorporation (Fontana, 2010). Attracting investors and acquiringequity would accord the business endless opportunity for exponentialgrowth.

Conclusion

As discussed, abusiness needs to adopt a structure so as to enjoy certain privilegesdue to legal separateness. Limited liability companies andcorporations are two of the most common business models. Both modelshave striking similarities. For example, they offer limited liabilityprotection to the owners of the business. They also allow thebusiness to exist as a separate legal entity from the owner.

References

Beach, R. B. &amp Seidler, W. E. (2010). LLC or Inc.?: Entityselection for a small to medium sized business. Eau Claire, Wis.:National Business Institute.

Fontana, P. K. (2010). Choosing the right legal form of business:The complete guide to becoming a sole proprietor, partnership, LLC,or corporation. Ocala, Fla.: Atlantic Pub. Group.

Mancuso, A. (2005). LLC or corporation?: How to choose the rightform for your business. Berkeley, CA: Nolo.

Minnesota Continuing Legal Education. (2012). LLC vs. Corporation:The cage fight battle of the entities. St. Paul, MN: MinnesotaContinuing Legal Education.

Piper, M. (2012). LLC vs. S-corp vs. C-corp. St. Louis, Mo.:Cengage Learning.