The proposed new product that an entirely new venture will be based on is the Knowledge Navigator Tablet PC. Capitalizing on the popularity of tablet PCs including the Apple iPad, the Knowledge Navigator is specifically designed for students. Included as standard are advanced technologies that provide students with the ability to connect to the Internet form literally anywhere while also having a specialized version of the Google Android operating system that automatically backs up their files to storage service DropBox. The EV-DO chipset is included within the Knowledge Navigator as standard, with a comprehensive data plan included in the price. This tablet is differentiated from all the others by being ready to go out of the box by students who need to gain access to online research sources, access databases, collaborate on project teams, and manage all files they are using across all other systems they own. The intent of this analysis is to decide if a sole proprietorship, partnership, C corporation or S corporation. This analysis also considers the tax, legal and accounting implications of each business type including SOX and FASB compliance. The analysis concludes with the best business organization chosen for building and launching the Knowledge Navigator.
Analysis of Each Business Organizations' Advantages and Disadvantages
Each of the four types of businesses have advantages and disadvantages specific to the creation of a business dedicated to producing and selling the Knowledge Navigator.
The sole proprietorship model is the easiest to create and often requires a very small amount of up-front investment, in addition to providing a high degree of flexibility to the owners and operators of the business (Fay, 1998). Sole proprietorships also have unlimited liability for debts which makes them attractive as a credit risk as lenders can assign credit liability to them as they would an individual. Owners also earn all profits and have discretion as to how they are reinvested as well (Miller, Burns, 1984) . The disadvantages of the sole proprietorship model include difficulty raising capital as a single proprietor or owner may not have as much collateral or credit history to gain access to more capital. Single proprietorships also have limited resources from a human resources standpoint as well, often with the founder and owner being the most influential, driving force in keeping the business going (Fay, 1998). There is also unlimited liability for business debts, and if the firm fails creditors will seek their funds from the owner of the business. Creditors can force the sales of the business and its dissolution if debts owed are not paid (Seidman, 1950).
Sole proprietorships rely on standard financial statements including income statements, balance sheets, and cash flow analysis. These financial statements stay private, just as they do for individuals,. This aspect of the sole proprietorship is very appealing to entrepreneurs who gain funding as a result. As a sole proprietorship is an extension of an individual's financial responsibilities, tax and legal implications are the same as those for an individual. Sarbanes-Oxley requirements do not apply to this form of business as it is privately held, in addition to FASB accounting standards (Thompson, 2011).
The second form of business is a partnership. Advantages include they are easy to establish, have the ability to generate more funding with two or more partners, in addition to the ability to recruit new employees with the potential of being a partner (Fay, 1998). Partnerships are often designed to orchestrate the abilities, skills and talents of multiple experts in a given field. Accenture and other accounting firms initially began as partnerships due to this advantage. Partnerships also can over time form a strong network that allows a business to survive and grow by assigning the best possible partner to a given problem or issue (Kessler, Richmond, 1984). The disadvantages of this approach to creating a business include partners being jointly and individually liable for the actions of other partners; in other words liability is shared across the entire company. This aspect of unlimited liability makes business insurance and other forms of liability management very time-consuming and costly for this type of business. Second, profits must be equitably shared if the partnership is to remain intact, and this can often cause conflict and dissention across partners. Partnerships also can restrict a business from growing as well as new clients can only be added that align to partners' core strengths (Thompson, 2011).
As a partnership is considered a separate legal entity with joint and several unlimited liability, financial statements are designed to reflect shared risk and liability. Often partnerships will have financial statements that are designed to show partnership-wide liability, in addition to joint and several unlimited liability (Fay, 1998). Tax implications for partnerships are also predicated on joint and several liability and the requirement that partners report their distributive share of income or loss and pass-through times as part of the individual tax returns. Financial statements include the four most commonly used including income statements, balance sheets, income statements and state of changes in financial position. Only if a partnership is public will they need to abide by Sarbanes-Oxley requirements and FASB reporting requirements (Thompson, 2011). Partnerships will also define risk mitigation strategies in their financial statement s as well, often defining the relative level of liability by partnership group in the case of a larger, publically-held partnerships.
The advantages of creating a C corporation include the ability to structure ownership across many different owners. This is a major advantage for those companies founded through private and public equity resulting in many shareholders. The C corporation can more easily go public and issue an Initial Public Offering (IPO) as well (Fay, 1998). This form of business structure also has the benefit of lowering the tax rate of an enterprise, lowering the tax rate on the $75,000 earned. Many small businesses often choose this model given this tax advantage, in addition to the limitation of liability as well.
The disadvantages of creating a C corporation include the double taxation inherent in its structure. Taxes are applied to the dividends paid on the stock and shareholders are also taxed on these distributions as well. C corporations often require an intensive amount of paperwork with state and federal agencies to ensure compliance to standards, even if they are publically held (Thompson, 2011). The four common financial statements are most often used in this type of business structure as well. Often C corporations will also rely on more expanded financial statements of owner's equity and changes in equity evaluations over time. There are significant tax implications for this type of business, even if it is privately held (Kessler, Richmond, 1984). State and federal filings of financial results are required. Legal implications are more significant than sole proprietorships and many states require a broad of directors to vetting by state boards in specific, highly regulated industries. If a C corporation is public they must abide by the Sarbanes-Oxley reporting requirements, and also report financials using FASB requirements. A publically-held c corporation will also need to report all material financial statements to also be in compliance to SOX requirements as well.
The S corporation differs from the C corporation in that the former has pass-through taxation while the latter has double taxation on all dividends. S Corporations are also more advantages from minimizing the amount of taxes shareholders pay on distributions as well, and owners can minimize the amount of self-employment taxes they pay as well (Thompson, 2011). This approach to corporate structure is designed to mitigate tax liability over the long-term.
The disadvantage of the S corporation is that it is limited to 100 shareholders or less (Fay, 1998). This makes it nearly impossible for an S corporation to be publically-held. Payment distributions to officers of an S corporation are also taxed…