Business Structure Essay

Business Structures

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FIN/571

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Professor xxxxx

Business Structures

There are several business structures that can be chosen by a business owner.  Each business configuration has advantages and disadvantages; thus, a business owner must consider them based on his or her business type, size, and business activities to maximize the value of the business.  The purpose of this paper is to identify the differences of three main business structures consisting of sole proprietorship, partnership, and corporation followed by illustrating how each of them may or may not be advantageous.  

A sole proprietorship is the most popular and easy form of business.  Approximately 75 percent of all businesses in the United States are sole proprietorships that normally consist of a small numbers of employees (Parrino, Kidwell & Bates, 2012).  The advantages of a sole proprietorship are easy to establish by simply filling a license or permit; furthermore, there is no approval required from either federal or state government.  The owner is allowed to collect all profits and make all business decisions on his or her own.  On the contrary, the disadvantage of a sole proprietorship is that the owner handles any debts that are incurred.  Usually, the business starts out from the owner’s home; therefore, such assets can be vulnerable to the debt (Getting Started, 2007).  A sole proprietor is responsible for legal obligations including business contracts, any torts of the owner and the employees during the courses of business (Types of Business Organization, 2014).  Additionally, the more profits the owner makes, the higher the tax rate goes up due to the tax being filed as the owner’s personal income tax (Parrino, Kidwell & Bates, 2014).

A partnership is set on an agreement that includes the name of partners, their roles and responsibility, and how the profits will be divided among the partners.  Depending on the degree of liability, the type of partnership can be determined as either general partnership, limited partnership, or limited liability partnership.  The general partnership is an arrangement where the partners are fully responsible for debts and legal obligations.  On the other hand, the partner of a limited partnership is liable only to the extent of the amount the limited partnership invested (Types of Business Organization, 2014).  The advantage of a partnership is that it is easy to form this type of business by obtaining business licensing and there is no need for federal or state government approval.  Additionally, profits are passed to the partners as their individual incomes (Types of Business Organization, 2014).  Whereas, in case the partner dies, the surviving partner may have to continue business with someone who was not originally part of the partnership unless it was particularly stated in the partnership agreement.  Moreover, the loss and profits of business must be filed as individual income taxes even though the business entity is not taxable (Type of Business Organization, 2014).