THE DYNAMICS OF DIFFERENT TYPES OF BUSINESSES AND A RECOMMENDATION OF THE BEST TYPE.
Business law
Author
Institution
Introduction
Date: 27th October, 2012
To: JAMES MADISON
From: THOMAS CRISPIN THEODORE
Subject: THE DYNAMICS OF DIFFERENT TYPES OF BUSINESSES AND A RECOMMENDATION OF THE BEST TYPE.
On 12th June 2012, you requested for a comprehensive report on the various characteristics of different categories of businesses. This information would form the basis for determining the most appropriate option for the expansion the TWINSALES MANUFACTURERS. The following is an all-inclusive outline of the different options and their features. In addition, the report incorporates a recommendation on the most appropriate form of business, considering the aspects of the different options.
Sole proprietorship
This is a category of business owned by a single individual who is personally responsible for its debts.
Advantages
However, the owner has full discretionary control over all business decisions and operations.
The same case applies to business profits as the owner can keep all profits to himself.
In case of moving or expanding to another state, the business does not have to file new documents with the state.
Disadvantages
However, the continuity or longevity of the business would be severely impended by the death or incapacitation of the owner.
Income from this business would be combined with personal income tax returns and filed in Schedule C. The owner is allowed to deduct office, automobile and other expenses from the income tax return as allowed by tax laws.
The owner would have to bear the losses of the business alone.
In case of a debt that surpasses the value of the business, the owner would have his assets taken up so as to pay the debts.
General partnership
A general partnership is formed in instances where two or more entities or individuals come together to form an unincorporated business for the sole purpose of making profits. Every partner, in general, has something to offer the business.
Advantages
Profits of a general partnership would have to be shared among the partners in line with the partnership agreement.
In addition, the control of the business remains with all partners with key decisions being made by a majority vote.
Disadvantages
It is worth noting that any liability of the business may extend or be tied to the property of the partners. Income taxes of this business would have to be combined with other incomes of the partners and taxed as individual income rather than business income.
The continuity of this business, however, is clearly limited. The death of one partner or even his insolvency would bring down the business. In case of moving to a new state, the business does not have to file new documents with the law authorities of that state.
Limited partnership
A Limited partnership refers to a category of business that consists of one or more limited partners and one or more general partners.
Advantages
In case of a debt, the limited liability partners would be shielded from having their property tied to the debt.
It is worth noting that the control of the business remains with the general partners, who have unlimited personal liability for the obligations, as well as debts of the business. A limited partner may vote on certain issues, but is not allowed to participate in active running of the business; otherwise he would lose his limited liability.
The profit is shared equally among the partners or in line with the partnership agreement.
In addition, limited liability partners must explicitly state their status when they are dealing with other parties.
Disadvantages
The continuity of longevity of the partnership would be affected by the insolvency of a general partner or even the death of a partner. The partnership may also be dissolved upon the pulling out of one of the partners.
In case of expansion or movement of the business, it is imperative that the business files documents pertaining to the status of the partners.
The taxation of a limited partnership is similar to that of a general partnership. The individuals forming the partnership would be taxed individually, in which case the profits accruing from the partnership would be combined with their other incomes then taxed.
C-corporation
A C-corporation is defined as a business entity whose income is taxed separately from the shareholders. The formation of a C-corporation would necessitate the filing of Articles of Incorporation, as well as the payment of the prepaid taxes and the requisite state fees with the appropriate state agencies.
Advantages
The control and management of C-corporations is vested on the Board of Directors elected by the shareholders. However, the directors have to make the key decisions pertaining to the corporation, but would not represent the corporation individually.
The continuity or longevity of the business is assured in the long-term. The ownership may be transferred to other people through selling of one’s shares.
Profits are shared according to the number of shares that an individual has in the corporation.
The directors or managers determine the amount that is to be shared among the shareholders, with the rest ploughed back into the business.
Disadvantages
However, it is worth noting that in case of expansion and movement of the corporation to another state would necessitate the filling of various documents with the state agencies.
In addition, the corporation has to submit its articles of association and memorandum of association alongside registration fee. These corporations are subjected to high regulation by the state, federal, as well as local agencies, in which case they have increased recordkeeping and paperwork burdens that are associated with the entity.
It is also worth noting that C-corporations are closely monitored by the state agencies, in which case they have to file comprehensive documents with these agencies.
C-corporation is subjected to taxation at the corporate level. However, it is worth noting that the shareholders may be subjected to double taxation both at the corporate level, as well as the individual level as dividends.
S-corporation
An S-corporation refers to a business entity that allows for the passing of the corporate income, deductions, losses and credits to the shareholders on their federal income tax, in line with the Internal Revenue Services.
Advantages
In essence, the income of this entity is subject to tax only one time by the federal government rather than twice as corporate income and dividends to shareholders.
In case of losses, the shareholders would be able to claim them on their personal income tax so as to offset their tax liability.
The continuity of this entity is perpetual as the deat or withdrawal of a shareholder would not affect the corporation’s existence.
The management of this corporation is usually done by professionals appointed by the shareholders or board of directors.
The board of directors, however, would be responsible for making key decisions pertaining to the management of the corporation.
Profits in this corporation would be shared according to the percentage of shareholding that an individual owns.
Disadvantages
S-corporation has stricter operational processes. They are considered as separate entities, in which case they require scheduled shareholder and director meetings, the minutes of those meetings, as well as the adoption and updates to the bylaws, records maintenance and stock transfers.
Limited liability company
A limited liability company refers to an entity that combines various features of a partnership and those of a corporation. The number of members in a limited liability company is unlimited and may include other limited liability companies, corporations and individuals. A Limited Liability Company exists as a distinctive entity, in which case its members would not be held or considered as personally liable for the debts and obligations of the entity unless they sign a personal guarantee.
Advantages
In addition, the personal property of the members is protected as the entity is considered as separate from the members. In essence, members would not be held liable for the debts of the entity unless they have expressly given personal guarantee.
Limited liability companies are flexible in their distribution of the profits as they may select various ways of distributing their profits.
Limited Liability Companies are not required to keep their formal minutes, record resolutions in which case they are easy to operate.
All losses, expenses and profits of the business flow via the company to the members, in which case the members would be shielded from double taxation.
The control of limited liability companies remains with the shareholders, mostly determined by the percentage of shareholding of the members.
Disadvantages
The continuity of limited liability companies is extremely inhabited as it would have to be dissolved in case of death of a member or bankruptcy.
Limited liability companies have more paperwork and complexity thanks to the ambiguity of its classification. This entity may be classified as a partnership, sole-proprietorship or corporation for the purpose of taxation.
Recommendation
As much as the various forms of businesses have their own advantages and disadvantages, I would recommend that TWINSALES MANUFACTURERS is converted into an S-corporation. The members would still have control of the key decisions pertaining to the business, yet they would be shielded from personal liability for business debts and obligations. In addition, the corporation would benefit from being subjected to tax only once at the corporation level as the expenses of the business and its incomes may be pushed on to the members. In addition, it is worth noting that the continuity of the business would not be severely affected by the death or bankruptcy of a member or even his bankruptcy. In any case, the shares of an individual or even the ownership may be transferred, albeit in line with strict observance of the IRS regulations. The owners still have a hand in the control and management of the business, although they would have to delegate the daily operations of the business to other professionals. As much as the entity would be required to adhere to strict paperwork, that con comes as an advantage as it would ensure accountability in decision-making and the proper recording of all aspects of the business. Movement to another location would undoubtedly necessitate the filing of articles of association with the legal agencies of that state, which is not much of a disadvantage especially considering the various advantages with which the option comes. Aspects pertaining to the profit sharing are appropriately taken care of, as the directors have discretion on the amounts that would be distributed to the shareholders, as well as the amount that would be ploughed back for other business operations. Equitability is ensured in profit sharing as the percentage shareholding determines the amounts that a shareholder gets.
