Choosing a Corporation over a Sole Proprietorship

Business Organization

When determining which form of business organization to adopt for one's business, it is important to consider a number of variables before making a decision. These factors can include: the level of control the owner wishes to have, the structure of the company, the company's level of vulnerability to lawsuit, expectations of profit/loss, and whether there is a need for re-investment of capital back into the company. These considerations can greatly impact the form of organization one chooses. For the case of West Casing, these factors when addressed point to an S Corporation being the best option for Steve West and his 6-man crew. This paper will explain why and S Corp would work for West.

The chief characteristics of the S Corporation are that the business is set up as a separate entity (so in the unfortunate event that there is a casing leak and the company is sued, Steve West himself is not liable but rather the company). The owner is considered a shareholder, as in a regular corporation, and can be hired as a regular worker. The S Corp stipulates that if there is a profit, the shareholder must be paid a reasonable wage. For tax purposes, this could actually be beneficial for West once the business does become profitable, because his own personal taxes will be less due to the wage that he receives. For his company, West would be the primary shareholder of the company, and though he is not anticipating earning a profit in the first couple of years, when the business does begin to turn a profit, West can pay himself a wage from the company and thus being personally taxed based on profits alone. The S Corp, like the LLC, allows the owner to avoid paying both corporate and personal taxes. The So Corp. would be beneficial for West because in addition, West would receive a salary from the business as well as personal dividends from profits (Dahl, 2015).

The S Corp would also be much better than starting a sole proprietorship because the latter would leave West exposed to lawsuit: with the corporation, he is better protected in case of accident. Even though West's company is currently small, he does plan to expand in the coming years -- and with expansion, the assumption is that profit will follow. Also, with expansion, risks go up -- and a corporate entity is better at mitigating risk than a sole proprietorship.

A partnership is most likely not in West's interest either, as there is no evidence in the case study that he has a partner or wants one. This is not a joint-venture and while partnerships offer tax incentives, the corporation is taxed similarly to the partnership organization, so there is nothing lost in that sense.

The only disadvantage to filing as an S Corp is that is one of the costliest types of organizations to set up. Sole proprietorship is the least expensive and easiest to arrange -- but it also leaves West exposed should there be an environmental accident involving a leak in the casing. In West's best interest, he should avoid setting up his business in a manner that allows him to be personally exposed in this manner. Another slight disadvantage is that there must be recorded shareholder meetings -- which means that West will need to form a Board (Laurence, 2015).

The first step in filing as an S Corp is to register first as a corporation. Once the business is recognized by the state as a corporation, West must organize a Board and then the IRS tax election provided for S Corp can be utilized in order to set up the business in this category. After these steps are taken, West's business will be in compliance with the IRS and must maintain this compliance through its duration.

References

Dahl, G. (2015). S Corp vs. LLC. INC. Retrieved from http://www.inc.com/guides/201103/s-corp-vs.-llc.html

Laurence, B. (2015). S Corporations. NOLO. Retrieved from https://www.nolo.com/legal-encyclopedia/s-corporation-facts-30002.html