Free Essay About Jane DOE
The owner of a manufacturing business has grown significantly and looking at making some necessary business decisions as profit increases, along with risk and liability. The company produces a number of items that require carpentry and wood work. These products include wood moldings, hardwood doors, high-end kitchen cabinets, specialty cabinets and bookcases for dens, home libraries, offices, and any merchandise made of wood. As a sole proprietor of his growing business with in house employees, as well occasionally hiring outside subcontractors, he is considering the type of business operation most suitable for his company. In consideration of the direction to take, he is looking at the risks and liabilities involved with the various options. Upon a thorough analysis, a decision for the course of action that is ideal and beneficial for him and the business can be suggested.
Several types of business structures to consider in the process of finding what is best for this particular business owner's organization. The ones to explore are a sole proprietorship, general partnership, limited partnership, C-Corp, S-Corp, and limited liability company (LLC).
A sole proprietorship is the most basic structure of small business run by one individual. The individual who owns the business is solely in charge and responsible for the company. The sole proprietor benefits from complete control of business decision as well as profit made in the business. No legal formalities are necessary in creating a sole proprietorship; any type of self-employed individual falls into this category.
The sole proprietor files taxes for the business as personal income tax under Schedule C in Form 1040. All profits and loss of the company are reported to this ("U.S. Small Business Administration", n.d.).
The drawbacks in sole proprietorship leave the single owner with a lot of pressure in providing capital in starting up the business. Aside from the risks involved in possibly borrowing funds, there is also the burden of loss that must be faced by the single owner. Added to these risks of sole proprietorship is the risk of full liability on the person’s business and personal assets that may be attacked in legal suit.
Additionally the potential for growth in a sole proprietorship are limited because of the single owner structure of this business. The size of the business is generally smaller, but this can be an advantage for maintaining longevity as interference is minimal.
General and Limited Partnership
In a business with a partnership, as the name states, more than one individual is involved in ownership of the company. If the partnership involves two people, details of the division of property are recommended in a legal agreement. The details should include information on how much each partner is bringing into the business (financially and otherwise) and what is expected in his or her involvement in the business. This is where the specifications of a general and limited partnership come in as factors. In a general partnership, an assumption is made of all persons invested in the business having equal profit from income, uniform risks of liability, and equivalent decision-making rights. The limited partnership is not always equal as far as the individuals investing in the business. Sometimes partners have limits on the liability and responsibility of the enterprise based on the percentage of ownership in the company. According to "U.S. Small Business Administration" (n.d.), “Limited partnerships are attractive to investors of short-term projects” (Partnership).
In a general partnership profit and loss are filed through each individuals personal income taxes. The business does not file taxes, but the owners are responsible for providing these business gains and losses equally distributed when filing their personal taxes.
The level of compliance in a general partnership is dependent on the flexibility of each partner in his or her role in the business. If compliance is high, the chances of success are higher because of the likelihood of growth and continuity increase the life of the business. Needless to say, if a partnership includes individuals who do not mutually share a vision and long-term goal for the business; it will be hard to maintain a successful company.
In the limited liability partnership (LLP) the business is treated as a separate entity that allows a limit to liability of the members involved in the company. A higher level of protection from risks to personal assets exists in the LLP. This business structure works well for organizations that have partners who may eventually leave the partnership. Investors are ideal candidates for becoming partners of LLP’s. Members of the LLP can buy out the partner who wishes to exit the partnership. The LLP has the potential for long term growth because of the flexibility in the structuring of this business model. Taxation of an LLP is similar to a general partnership, with each member responsible for reporting on gains and losses through their personal income taxes. Sharing of profits in an LLP can become complicated if clear guidelines are not developed in the beginning phase of the partnership. Although legally a formal contract is not expected to be provided, it is recommended to keep the investors secure in their positions in the business.
The C-Corp stands for corporation. The C-Corp is the structure of the large corporations such as Google, Inc., BP, Ford Motor Company, and Allianz to name a few. The corporation is considered an entity of its own and shareholders are not liable for the issues that the corporation may come across. This type of business is appropriate if the company is substantial and has many employees. A well-established sizeable business is structured as a C-Corp, not small businesses. Setting up a C-Corp and filing taxes as a C-Corp is much more complex than in some of the other type of business configurations.
The corporation is an entirely unique business structure compared to several of the other types previously discussed. As an entity of its own, there is no liability involved for stakeholders of the company. The corporation is not associated legally to any one or more particular people, instead executives and shareholders are connected to the business in a safer range than other business structures. The investors involved in a C-Corp only risk what they invested by way of stocks versus risking a loss of personal assets if problems ensued for the corporation. Ultimately there is a protection by ‘the corporate veil’ for the individuals involved in running a corporation. The largest drawback of a C-Corp is the double taxation that is not common in other business formats. The corporation must file its own taxes, claiming profit and loss; stakeholders do not get to file these in their own personal tax returns, however, if there are gains from dividends earned, taxes must be paid on the earnings. Corporations generally have a long life because it does not rely on a handful of individuals, but a group of investors that can be interchanged. It is a much more solid structure perfect for a large business that will be around for many years.
The S-Corp is a business structure that requires the involvement of the IRS to get started. The benefit of this type of set-up is when a company is not necessarily a huge organization but wants the protection of the corporate veil. Liability protection and tax benefits are factors that benefit some organizations when going the route of an S-Corp. Any legal problems that the company encounters will allow protection for the individual owner or owners of their personal investments. The owners are not protected necessarily from personal litigation by employees who may have experienced some workplace issues.
The S-Corp files taxation is distinctive because profit and losses are reported through transactions called distributions, which are then provided to ‘shareholder’ and reported through personal income taxes. The owner is required to pay him or herself fair market wages for their work for the corporation ("U.S. Small Business Administration", n.d.), which also gets taxed. A primary tax benefit of the S-Corp exists in the distributions earned by shareholders to be exempt from taxation. This is not a rule all states follow, some may still treat the S-Corp like a C-Corp and tax distribution earnings. Compliance and control in an S-Corp is easy if ownership is shared among a smaller group of people, all of whom receive a fair amount based on the number of stocks they have purchased in claims of ownership of the company. The longevity of an S-Corp is similar to that of a sole proprietorship or partnership; there is no guarantee of long-term success or failure. That would be decided by the functions of how valuable the company is for its consumers. Expansion of the S-Corp may be more tangible with an ability to increase the number of stocks that the company can sell, allowing new investors to buy into the company. With more capital brought in through the purchase of the stock, funds to expand are easily available.
Limited Liability Corporation
The big difference between a corporation and an LLC is the way that liabilities and taxes are dealt with. Similar to the corporation, the shareholders (owners) of the LLC have protection from loss of personal assets if legal action is taken against the business. The company is not treated as its own entity, but its ‘members' are held responsible for this type of business structure ("U.S. Small Business Administration’, n.d.). Similar to a partnership, profit and loss that take place will be filed through the members personal tax returns. Tax benefits of the LLC are superior in this business structure since ‘pass-through’ taxation remains permit able. Prevention from double taxation helps in profit retention for investors of an LLC. The LLC has multiple benefits because of the protection it allows, as well as the ability to retain profit with the tax benefits. Expansion and longevity are extremely feasible with the combination of these advantages. The LLC seems to be an excellent model for many types of businesses.
The manufacturing business run by its owner exists as a sole proprietorship. One can see that although this has been beneficial for the individual when starting this company, as the business grows, risk increases. The business works with multiple people, both employees of the company and outside contractors’ further complicating dynamics as the business grows. As a sole proprietor, the business owner is extremely vulnerable to losing personal assets if a lawsuit was filed against the enterprise. The nature of his business increases risk of injury creating valid reason to consider protection from litigation. Something as simple as a cabinet not placed correctly for a client could become a big legal mess for the company, and as it stands the owner would become solely accountable.
The company is expecting a profit of over $600,000 (before taxes) in the coming year. Risk, of paying exorbitant taxes, is a reality that the owner should expect as a sole proprietor as profits increase. There are numerous justifications for why the owner of the manufacturing company to explore a new business structure for his organization.
With a better understanding of the concepts of the various business structures, one can confidently recommend the direction that is ideal for the manufacturing company. Of the different options explored, the S-Corp or LLC appear to be most beneficial for this particular company. The company is large enough for risk associated with the business to affect his personal assets, making it one of the priorities and factors to take into account. The other main issue due to the size of the company is tax implications with the increased rate of profit.
If the owner goes the route of becoming an S-Corp, he will undoubtedly protect his personal assets in case of external entities attacking the business. He will not be protected from employees filing claims against the company, so this is one of the drawbacks of the S-Corp. The primary benefit aside from some protection to the personal assets is the tax benefit to the owner and company. The company will not face double taxation by the IRS when it is an S-Corp (“IRS”, n.d.).
The other choice is the LLC, which may be a suitable option for this manufacturing company. As a limited liability corporation, the protection of personal assets is provided for the owner. The filing of taxes may be bit less complicated with the LLC since he is already familiar with declaring profit and loss in his personal income taxes. There is a benefit in a deduction of taxes for employee benefits as well.
When comparing the two possibilities advised for the company, clearly the limited liability corporation (LLC) is most beneficial to the concerns and functions of the business. The protection from loss of personal assets is handled in the structure of the LLC. Many of the concerns for this business owner revolved around the risky nature of his business, which made him vulnerable to law suits by clients and workers. The other reason to justify an LLC for this business owner is to protect profits earned from double taxation.
The only additional consideration would be to discuss developing a contract between the company and its employees for added security. The contract would be best formulated with the help of a lawyer to ensure a legally binding agreement (a contract) he requires his employees and subcontractors sign when starting work with his company. Hopefully between transferring to an LLC, along with incorporating a contract with employees and the contractors, most of the concerns he has had will be addressed. Utilizing the suggestions is a sound business decision to make as the company continues to grow.
IRS. (n.d.). Retrieved from http://www.irs.gov/Businesses/Small-Businesses-&-Self-
U.S. Small business administration. (n.d.). Retrieved from
U.S. Small business administration. (n.d.). Retrieved from https://www.sba.gov/content/s-
U.S. Small business administration. (n.d.). Retrieved from https://www.sba.gov/content/sole-
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