Introduction
Choosing a company’s organizational structure is unquestionably critical for any entrepreneur. The format of an establishment has a direct impact on the daily operations of the enterprise. If a firm’s legal arrangement changes, so do the amount and type of taxes it owes to the government. Complying with taxation regulations is essential in setting a positive working relationship between a company and the tax authorities. Although all business structures present certain benefits, a partnership is the best organizational form because it is based on the mutual agreement of the involved parties and offers monetary advantages with little difficulty.
Types of Organizational Structure
One of the primary types of an enterprise’s legal design is a sole proprietorship (SP). Such a business structure is fully owned and managed by one individual responsible for all financial risks (Makudza et al., 2022). The first step of the formation process of an SP requires the entrepreneur to settle on a name for the business. They should then raise the required capital and obtain the necessary permits and licenses, upon which they can begin their operations once issued the permit. The owner is mandated by law to correctly and accurately report their taxes to the relevant authority. The proprietor can sell their possessions to pay off the entity’s costs and meet its commitments, but such a possibility exposes the entrepreneur’s assets to risk if the company goes bankrupt. Accordingly, SPs rarely grow into large companies and typically do not last (Makudza et al., 2022). Although starting an SP may be relatively uncomplicated, such a business form will likely fail over time.
SPs are distinct organizational structures with specific advantages and disadvantages. Because an SP is owned by one person, the lone proprietor receives all profits from the firm (Makudza et al., 2022). As a result, the enterprise’s net income or loss is subject to taxation at the same rates as individuals (Rogers, 2012). One of the benefits of functioning as a sole proprietorship is the ease with which the company can be established. Creating the enterprise with the owner’s present capital is also feasible. One downside of running a firm as an SP is the danger to the entrepreneur’s assets. Furthermore, raising funds for a sole proprietorship is difficult because the company cannot issue shares to its investors. Consequently, one may choose to start their business as an SP when they are willing to rely only on themselves.
A partnership enterprise is created when two or more entrepreneurs come together and decide to begin a company. The formation commences when they choose an appropriate business name for their entity. The involved parties must draft and sign an agreement known as a partnership deed that will govern their operations (Soener & Nau, 2019). The associates of the established organization are mandated by law to comply with tax regulations before starting their operations. Partnerships represent more complicated institutions than sole proprieties and are based on mutual agreements.
Some business structures have several variations for entrepreneurs to select. Partnerships have two forms: the limited partnership (LP) and the limited liability partnership (LLP). One of the associates in an LLP has unlimited liability, whereas other companions only have limited liability (Rogers, 2012). The partners with restricted responsibility only have a partial say in running the company. Since limited liability is granted to every owner of an LLP, the personal assets of each member are safeguarded if the business goes bankrupt. The members in LLPs and LPs are responsible for filing their tax returns, except for the unlimited associate who is accountable for filing and paying self-employment taxes. Those who decide to register their firms as partnerships can choose from the structure’s two variations.
Furthermore, a partnership offers several benefits since the business unit allows members to share financial and operational responsibilities. Associates might hail from various occupational backgrounds, contributing to the organization’s resourcefulness (Rogers, 2012). One of the potential drawbacks of forming a partnership is the increased likelihood of disputes between the involved parties, specifically about the distribution of duties. Moreover, such business structures can have problems raising funds since the owners cannot sell shares on a public stock exchange. When considering the partnership form, entrepreneurs must resolve if the benefits outweigh the disadvantages.
A limited liability company (LLC) is created when individuals come together and agree to start a business operation. They are required to prepare registration documents, including but not limited to a memorandum of association, articles of organization, and the list of directors. Upon submitting the papers, entrepreneurs will receive a certificate of incorporation and certificate of trading, which permits the firm to start working. When interacting with other companies, an establishment’s principal purpose poses a moderate danger to the owners’ assets. If an enterprise is sued or declares bankruptcy, an LLC prevents the plaintiff from seizing the owner’s assets, such as vehicles, savings, and land (Lubberink, 2019). In addition, since an LLC’s revenues can be added to the owner’s income, the LLC is exempt from paying corporate taxes. A member of an LLC is considered self-employed and therefore obligated to pay self-employment taxes. LLCs have a particular resemblance to partnerships but are distinct in their formation and certain processes.
LLCs may appear moderately more complicated than other business structures but present specific advantages. The main benefit of LLCs is that shareholders’ liability is limited solely to the capital they have financed for the company. Due to many involved people, the participants can raise more capital comfortably and sustain their operations efficiently (Soener & Nau, 2019). At the same time, the primary disadvantage of LLCs is that shareholders are likely to have different interests, which can result in conflicts and losses. LCCs are financially promising but are affiliated with substantial risks.
Corporations represent the final business structure that entrepreneurs should regard. Such an organization needs a minimum of ten individuals and a registration certificate to begin its operations. Corporations provide their owners with complete asset protection from any potential liabilities. A large quantity of recordkeeping and reporting procedures are necessary for the functioning of such a firm (Horváth & Szabó, 2019). Most corporations pay taxes not only on their profits but also on the dividends they distribute to their shareholders, which leads to considerable taxation. Nonetheless, the main benefit of such establishments is that the organization’s activity continues whether a shareholder dies or leaves the enterprise. Moreover, business owners have limited legal liability under the law. Corporations are permitted to sell shares on the stock market and, therefore, can easily accumulate vast wealth. Nonetheless, although the owners have limited legal liability under the law, most businesses cannot meet the conditions for incorporation due to the significant costs associated with their creation. Corporations offer sufficient advantages but can be difficult to manage.
Conclusion
To summarize, a partnership is the best organizational arrangement to start a new business because its advantages outweigh the drawbacks. Unlike a sole proprietorship, such a form of enterprise is based on a group of people united under one mission who are ready to put effort into ensuring the company’s viability. Compared to LLCs and corporations, partnerships require moderately easier steps to form while offering benefits, such as safeguarding personal assets if the firm goes bankrupt. Therefore, those who intend to found a company should select a partnership business structure, as it provides more opportunities for novice entrepreneurs.
References
Horváth, D., & Szabó, R. Z. (2019). Driving forces and barriers of industry 4.0: Do multinational and small and medium-sized companies have equal opportunities? Technological Forecasting and Social Change, 146, 119–132. Web.
Lubberink, R. (2019). Social entrepreneurship and sustainable development. Methods in Molecular Biology, 1–11. Web.
Makudza, F., Mandongwe, L., & Muridzi, G. (2022). Towards sustainability of single-owner entities: An examination of financial factors that influence growth of sole proprietorship. The Journal of Industrial Distribution & Business, 13(5), 15-26. Web.
Rogers, S. (2012). Essentials of Business Law. Bridgepoint Education, In.
Soener, M., & Nau, M. (2019). Citadels of privilege: The rise of LLCs, LPs and the perpetuation of elite power in America. Economy and Society, 48(3), 399-425. Web.