Business structure options and selection criteria

Business

Considerations for a Business Plan; Structure and Financing

Setting up a new business can be daunting; making the right decisions during the planning stages may prevent later problems. Two main issues are whether or not to take on partners and how to finance the venture. This requires consideration of advantages and disadvantages associated with different firm structures and the potential sources of financing that may be available.

There choices are sole proprietorship, partnership, limited liability company, and corporation. The sole proprietorship is one of the simplest, and also one of the most common business structures, and is administratively simple as the business is not have its own legal identity, but is an extension of the business owner. In this type of business there will be a single owner, which has some advantages; the owner has total control over the business, and as the income is classed as the individuals' income, tax returns are relatively simple, as only one set of tax returns will be needed (Conviser, 2009). This can also provide some cost advantages. However, there are also some disadvantages associated with this business type. As the business does not have its own identity, it is the owner that takes on full personal responsibility for liabilities and obligations of the business (Conviser, 2009). This responsibility will continue even if the business ceases trading. The light of the business is dependent upon the owner, and the business will not continue to exist if the owner ceases trading or dies (Conviser, 2009).

A partnership is a structure where two or more people work together with a common aim. Two forms of partnership exist; general and limited liability. The general partnership resembles a sole proprietorship, the business will not have an independent identity, but will be an extension of the two or more owners, and revenues will be reported on the personal tax returns, so setting up in this manner is simple, and has a relativity low level of bureaucracy. The default position is that all partners are equal, and will have an equal share of the profits unless there is a partnership agreement which specifies differently. A major disadvantage of a general partnership can be the presence of joint and several liability; meaning that all partners can be held responsible for 100% of the firms liabilities, for example if one partner disappears or dies the remaining partner(s) remain liable for all debts. All partners in a partnership have the power to enter into biding agreements on behalf of the partnership, unless specifically prohibited by a partnership agreement, so it is a structure which requires trust.