A Suitable Business Structure for an Emerging Rock Band - Coursework Example

A Suitable Business Structure for an Emerging Rock Band Student’s Name Class Institution City and State Date Introduction Starting a business requires proper planning to avoid potential pitfalls. The potential entrepreneur needs to do a number of things before setting up the business. These include self-analysis, determination of concept feasibility while putting all regal requirements into consideration. Development of a business plan and arranging for business financial is also very vital when planning to start a business. Music is a career. Therefore, an emerging rock band requires proper advice to success in their business. This article looks into the available business options available to an emerging rock band. It explores the forms of business structure and the associated financial structure. With reasons, it also states the recommended form of business structure for the band. Business Structure Choosing the structure of the business is the most significant decisions when starting a company. A firm ought to assess all available alternatives and select the one that satisfies its demands in the best way. This should be evaluated very carefully since changing the form of a business can be very costly, especially tax wise. Gibson and Fraser (2007) suggest that before adopting the legal business structure, entrepreneurs should consider six key points. These include, liability obligation of the individual owners, the obligations of the business and its owners in terms of income tax, formalities for filing legal papers, management of the business, business financing as well as liquidity of equity investments in addition to the life of the commerce. While choosing a business structure, every investor wants to limit his or her personal liability to the business and to reduce taxation especially by avoiding double taxation (Lamoreaux & Rosenthal 2006). There are different business structures as outlined below. Sole Proprietorship This form of business is owned and controlled by one person. It is legally perceived as an expansion of the proprietor because he or she bears all responsibilities as well as profits and losses. The business form has unlimited liability and therefore personal assets of the owner are not protected from business losses. The business does not pay income tax. Instead, tax is obtained from the income through his or her income tax return. Other than a business license, sole proprietorship does not require any other formal filing unless it has a registered business name different from that of the owner (Behrenfeld & Biebl 1989). The business is normally financed and managed by the owner and is terminated when the owner wants to or when he/she dies. This form of business can be converted into a partnership, a limited partnership, or a corporation without incurring tax obligations. General Partnership This is a union of two or more persons to own a business jointly. Co-owners finance the business, manage, and share profits and losses. General partnership does not protect any partner from liability. Partners bear full liability for actions of any of the partners. Income tax is taxed at an individual rate. However, partners are required to pay self-employment tax on earnings generated through partnership. Regardless of whether the profits from the business have been distributed or not, they must be reported in owners’ income tax return. This can result to negative cash flow to partners if the profit distributes is less than the tax liability. In addition, general partnership does not give fringe benefits at a lower tax cost. General partnership can be changed into a corporation without incurring any tax obligation. Although general partnership does not require filing of formal documents with the state nor does it need written accord amid partners, it is advisable that the partners sign partnership agreement (Davies & Lawrence 2005). Limited Partnership Two or more people form limited partnership. In this form of partnership, at least one of the partners is a general partner and at least one is a limited one. The general partner enjoys limitless accountability from the business whereas the accountability of the limited partner is protected from the business. This differentiates limited partnership from general partnership. In limited partnership, income is not reported at business level but at an individual level. To start a limited partnership, a limited partnership certificate must be filed with the state. General partners are the only ones mandated to manage the business, as they are fully liable to all business activities. Corporation This is a legal entity. Formation of corporations is governed by the state. The state set statutes that outline the formal process of incorporation. There are two types of corporations i.e. C Corporation and S corporation (Conard & Alfred 1999). C Corporation can either be publicly or directly held. Publicly assumed corporations are owned b the public and have some kind of public exchange process e.g. stocks that are publicly traded. On the other hand, few shareholders own closely held corporations. The shareholders are normally actively involved in management of the entity. This form of business offers personal liability of the shareholders from the activities of the business. These corporations allows for double taxation as taxes paid on profits earned at the corporate level as well as at an individual level. Upon formation, a corporation must file an article of incorporation with the state. They are also required to draft by laws that guide the operation of the corporation. A corporation operates a business as an individual and thus pays tax, own property, hire employees, and face legal issues pertaining to the business. It can also borrow money and enter into contracts. Corporations are financed from a variety of sources with securities, debt, or equity being the most common means. Stockholders, the directors, or the officers are all involved in the management of these corporations. S corporations on the other hand are legal entities that are not taxable. It combines some advantages from partnership and some from C corporations. It offers limited liability to shareholders. This form of business is financed and managed in almost the same way as the C Corporation. Limited Liability Company (LLC) This new form of business must include two or more members. Members are not held personally liable for the obligations, debts, and liabilities of the LLC. Members therefore only risk their capital investment. LLCs are allowed by law to own property, borrow and lend money and enter into contracts with other entities. To start an LLC, firms’ articles have to be filed with the state. Members should also sign an operating agreement that addresses the operation of the entity. LLCs are also required to file an annual report showing its position at the end of a financial year. This form of business does not pay taxes on profits made. Instead, members are required to report profits distributed from LLCs when filing their personal tax returns. This ensures that there is no double taxation. LLCs are among the easiest forms of business to finance. They can be financed from both equity and debt fund (DeNee 1993). Recommendation This article recommends rock band to adopt the limited liability company as their business structure. It is easy to start as opposed to corporations. The only requirement is filing of the article of association with the state and drafting an operating agreement. LLC protects the members of the band from all liability of the business. In as much as limited liability partnership and corporations offer limited liability to partners and shareholders respectively, LLC presents as the business form of choice as it has other advantages that favour the band. The band member may be disciplined and committed to ensuring the group succeeds. However, this does not guarantee future mistake by member that may cause losses to other member of the band. This aspect makes LLC the best business form for the band. As the band is preparing to enter into a contract with a record company, this form of business becomes the best for the group. This is because it allows the band to enter into contracts with other companies. Contracts have a number of elements; an offer, acceptance, a counter-offer and a request for information. Despite the signed contract, one party may fail to honour the terms of the contract to the latter. Breach of contract may result to financial losses and legal battles. This emphasis on the importance of liability protection provided for by an LLC. In addition, LLC offers pass-through tax advantage similar to that to partnership depending on the structure of the LLC. Proper structuring of the company will ensure that there is no twofold taxation i.e. at the business level and at an individual level. This will ensure that only the members will be taxed while filing their income tax return and avoid taxation at the level of the business. The aim of every business is to maximize on profits. Taxation lowers profit margin. It is therefore very important for the rock band to adopt a business form that cushions them from excessive taxation. This further emphasizes on the reason why the band should start an LLC. As a new venture, the band will require a business form that increases their financing options. LLC can be funded through debt and equity. The band members are more likely to finance the business. As this is a new venture, members’ contribution may not be enough to fund all the business operations. It is therefore recommended that they start an LLC that provides more financing options. This make LLC superior to sole proprietorship or partnership which are limited financing only to the owner’s savings or partners’ contribution respectively. Management flexibility is another reason why the band should adopt an LLC form of business. Depending on the size of the band, the band members are at liberty to appoint some of the band member to take up management responsibilities of the band. They can also hire a specialist to manage the affairs of the band. This makes an LLC a better option as compared to a limited partnership that does not allow limited members from involvement in active management of a business. Unlike sole proprietorship and partnership, which ends with the owner’s or partner’s death and when a partner withdraws from partnership, LLC allows for transfer of ownership though the majority of the members must approve it. This ensures continuity of the business despite death or withdrawal of a member from the company. Therefore, LLC remains the best form of business structure that suits the band. Reference List Behrenfeld, WH, Biebl AR 1989, Business entities, American Institute of Certified Public Accountants, Inc, New York Conard, AF 1999, Corporations in perspective, Foundation Press, New York. Davies, RN, Lawrence KH 2005, Choosing a form of business organization, Small Business Studies Duke University School Of Law, Durham, North Carolina. DeNee, AG 1993, Limited liability companies, Research Institute of America, Inc, New York. Gibson, FD 2007, Business law, 5th ed., Pearson Education Australia, NSW. Lamoreaux, NR, Rosenthal, JL 2006, Entity shielding and the development of business forms: a comparative perspective, 119 (6): 238 Read More