Fundamentals of Business Organizations - Essay Example

Business Structures Student’s Name Institute Introduction A lot of individuals always aspire to startup businesses to enable them conduct their activities with an aim of realizing profits. However, starting up a business is not as easy as one might think, which is attributed to the fact that the individuals have to select a business structure which best suits them. Business structure refers to the organizational framework of any institution which is recognized by legal provisions within a certain jurisdiction with an aim of conducting commercial activities. Therefore, form the definition it is quite clear that business structures exist for the sole purpose of providing a platform to conduct commercial activities. However, it should also be noted that the business structure adopted must be recognizable by law. This means that individuals cannot choose a business structure which under the law is unrecognized (Fontana, 2010). The common business structures that operate in Australia include; companies, sole proprietorship, partnership, trusts and corporation. Companies are the most used business structures according to recent statistics with trust being the least used business structures. Each of these business structures bear different advantages and disadvantages over the other as will be illustrated later in this paper. However, in choosing any of these business structures there are certain factors that one has to consider in determining the most suitable business structures (CCH, 2009). Tax liability This is the first factor that one should consider in selecting the most suitable business structure when starting any business. Each business bears a different tax liability, which is to say that each of the business will be taxed at a different tax rate. Therefore, it is prudent for one to examine the tax implications of each the business structure before deciding on the most suitable business structure. Additionally, one has to examine at the process of tax payment of each business structure. Certain business structures such as sole proprietorship have simple taxation procedures. However, business structures such as companies have complex taxation regimes that involve a lot of paper works. Therefore, with this in mind it becomes quite easy to select a business structures that suits the intended commercial activities (Fontana, 2010). Asset protection This is the other factor that individuals wishing to set up a business must consider as it not only relates to assets of the business but assets of the individuals running the business. Each business structure offers some form of asset protection which in most instances is different. However, there are instances where two or more different business structures will offer almost similar protection in regards to assets. Therefore, one has to consider this factor before deciding the most suitable business structure to conduct commercial activities (Curtis, 2012). Cost of set up It is also important to examine the costs that one are likely to be incurred when setting up a business. This is determined by the type of activities going to be conducted and the materials needed in running of the business. Additionally, one has to factor the charges set out by the government in relation to starting of business entities (Spadaccini, 2007). In addition to these, one also has to consider the costs that they are likely to face in running of the business upon establishment. Succession According to Curtis (2012), it is also equally important for an individual or individuals wishing to form a business entity, to consider issues of succession in relation to the business entity. Certain business structures such as sole trader ship and partnership cease to exist upon the death of the sole trader or partner where partners were two. However, other business such as companies enjoy perpetual succession. This means that the death of any of the directors does not in any way affect the running of the business. Flexibility According to Henderson, (2009), flexibility is also another significant factor that individuals wishing to select a business structure must consider. Flexibility refers to the ability of changing from one business structure to the other after sometime. There are certain business structure that can easily change depending on the prevailing condition of the business. However, there are other business structure that are so rigid that changing them is almost impossible. Therefore, it is always recommended to choose a business structure that is flexible Therefore, with these factors in mind it becomes quite easier for an individual or individuals to select a business structure that best suits the commercial activities. Therefore, having looked at the factors to consider in selecting a business structure, it is equally important to examine each business structure separately. In doing so, one gets an in-depth analysis of each of the business structure from the way they are formed, the manner in which they are run and finally how each of them ceases to operate (Henderson, 2009). With such information it becomes easier to decide on the business structure that is most suitable. Sole proprietorship This is the simplest business structure compared to other business structures. In addition to these, sole proprietorship is equally inexpensive in relation to setting up when compared to other business structure (Curtis, 2012). A sole proprietorship is governed and run by a single individual whose name makes up the business name. However, where the sole trader wishes to have the business running under a different name other than his name, then the business has to be registered as per the provision of Business Names Registration Act 2011. Sole proprietorships are normally set up in instances where the business does not require a lot of employees (CCH, 2009). Advantages The main advantage of setting up a sole proprietorship is the fact that it is cheap set up and end. This because it does not involve a lot of paper works. Additionally, sole proprietorship have the simplest taxation structure, thereby making it easy to meet the taxation liabilities (Henderson, 2009). Disadvantages However, despite these advantages sole proprietorship is compounded by various disadvantages which may make it the least suitable business structure. As the name indicates it can only be established by a single trader thus the name sole proprietorship. Additionally, sole proprietorship provides unlimited liability (Henderson, 2009). This can be attributed to the fact that a sole proprietorship is considered an extension of the sole trader. This means that incase of any litigation, personal assets of the trader may be attached together with the assets of the business. This will arise where the assets of the business are not sufficient. Additionally, sole proprietorship does not enjoy perpetual succession, meaning that if the sole trader dies then the business ceases to exist. (Fontana, 2010). Partnership A partnership on the other hand is defined by the Partnership Act of 1963 section 6(1) as an association of two or more individuals to conduct a business as co-owners with an aim of making a profit. The individuals wishing to come together must share similar interest, which if not the case then the association will not amount to an association. This means that they cannot be an association where the individuals conduct different activities under the same name. In addition to these, partnerships are probably the easiest association involving two or more individuals with an aim of making profits. Individuals in the association are required to contribute to the establishment of the partnership. Under the Partnership Act 1963 section 6(1) individuals have option of forming a normal partnership or limited partnership. As much all these entities are partnerships they have differences which distinguish one form of partnership to the other (Spadaccini, 2007). General partnership The general partnership is the most common form of partnership and is sometimes referred to as the normal partnership. It should be registered under the Partnership Act 1963 as a partnership. A normal partnership is formed by two or more individuals which is a requirement of any partnership under the Act (CCH, 2009). Advantages One of the main advantage of partnership is in relation to taxation, which is attributed to the fact that tax is imposed on the individual’s income. Tax liability is divided according to the ration set out in the partnership. This reduces instance where an individual is overburdened with tax liability. Additionally, partners can enter into contractual agreement using the partnership’s name (Segel, 2009). Disadvantages The main disadvantages associated with partnerships if in relation to liability. This is attributed to the fact that partners in a partnership do not enjoy protection from liability involving the partnership. This means that just like sole proprietorship, a partnership is an extension of the individuals, meaning that they too can have their assets attached together with assets of the partnership (Spadaccini, 2007). Limited liability partnership Under the Partnership Act 1963 section 51 a limited liability partnership is described as a separate legal entity from the partners. Limited partnerships are more flexible when compared general partnership. This is attributed to the fact that a limited partnership consists of general partners and limited partners whose liabilities differ. General partners are entrusted with the day to day running of the partnership. Limited partners on the other hand are generally entrusted with raising of capital for the partnership, whose liability is limited to the amounts they contribute to the partnership (Usa, 2009) Advantages According to Fontana (2010), the main advantage of a limited partnership is the fact that a limited partnership has a legal personality. This means that a limited company unlike the general partnership is independent of its partners. Therefore, a limited partnership has the capacity to acquire assets under its own name. Additionally, a limited company has the capacity to sue and be sued under its name. Disadvantages According to Fontana (2010), one of the main disadvantage involved with limited liability companies is the fact that it involves a lot of paperwork and legal formalities in setting up which could prove challenging. Additionally, the taxing procedure involved with limited liability is a bit complex which could prove challenging. Corporations Corporation are governed by the Corporations Act of 2001, which describes corporations as associations of two or more individuals with the intention of creating a separate legal entity. This means that corporations do have legal personalities, meaning that they are separate from their founders. There are two major corporations, and they are; C Corporation and S Corporation. Additionally, a corporation has the capacity to acquire assets and dispose assets under its name. In addition, to this a corporation can sue and be sued under it name. Despite the similarities of C Corporation and S Corporation, it is important to note that s corporation is not taxed at the corporate level (Spadaccini, 2007). This means that tax is shared equally among the shareholders. However, C corporations are taxed at corporate level at a rate of 30% and at the same time the shareholders are taxed at a personal level. Advantages According to Fontana (2010), under corporations shareholders are protected from personal liabilities while acting within the scope of the duties. However, this may be withdrawn where a shareholders acts outside the scope of his duties or commits a criminal offense. Additionally, corporation is a legal person and can therefore acquire assets by its name. A corporation can also sue or be sued under it name. Disadvantages One of the main disadvantages is in relation to C Corporation whereby they suffer double taxation on dividends. Additionally, C Corporation involve a lot of legal formalities upon creation which could prove quite challenging (Spadaccini, 2007). Limited liability companies Limited liability companies are governed by the Corporation Act of 2001, and are described as artificial persons created by individuals to run commercial activities and enjoy protection from personal liability. This means that under the law the Limited liability Company and its founders are considered as two different person. Additionally, a Limited liability company much like a corporation can sue or be sued under its name. In addition to these, it also enjoys perpetual succession (Spadaccini, 2007). Perpetual succession refers to continuous existence of the company even after the death of the founders. Surveys conducted in Australia indicate that Limited Liability Companies are most commonly preferred business structure. This can be attributed to the various positives associated with limited liability companies such as limited liability for its shareholders and employees Advantages The main advantage is in relation to limited liability conferred to shareholders and employees of a company. Therefore, this means that at no instance can assets of an individual in the company be attached in cases of bankruptcy. Additionally, individuals are protected against prosecution where they act within the scope of their duties. Furthermore, a Limited Liability has the capacity to sue and be sued under its name as it classified as legal person. Additionally, Limited Liability companies enjoy continuity of life, in that the company does not cease to operate upon the death of any of its founders (Spadaccini, 2007). Business structures relationship to asset protection Having looked at each of the available business structure it is quite easy to determine which business structure provides maximum assets protection. A sole proprietorship does not provide any asset protection. This is attributed to the fact that sole proprietorships are considers as extensions of the sole trader. Therefore, this means that in instances of litigation on matters such as bankruptcy there is a high likelihood that the assets of the sole trader will be attached. This could arise in instances where the assets of the business venture are not sufficient. With this in mind then it quite clear that sole proprietorship is not the most suitable for asset protection. Partnership just like sole proprietorship are considered to be extension of the partners (Fontana, 2010). Therefore, partners in a partnership enjoy unlimited liability, meaning that their personal lives can be affected by legal implications such as bankruptcy. Therefore, in terms of assets protection is not the best business structure due to the fact that they do not enjoy protection. However, corporations and limited liability companies enjoy limited liability, meaning that assets enjoy protection from creditors wishing to collect their debts. However, limited liability companies offer maximum asset protection from creditors. Therefore, shareholders of limited liability do not in any way have to worry about their properties when faced with legal issues such as bankruptcy in relation to the company (Henderson, 2009). Business structures and taxation It is equally important to consider the taxation implication accorded by each of the business structures. By looking at the taxation implication it becomes easy to determine which business structure suits the equal sharing of taxes. In sole proprietorship tax is levied on the sole trader, because the business venture and the trader are not differentiated for taxation purposes. Additionally, partnership are treated similarly to sole proprietorship in that taxation is levied on the partners (Henderson, 2009). However, unlike in sole proprietorship tax is shared among the partners as per the prescribed ratio stipulated in the partnership agreement. Taxation of corporation on the hand is levied on the corporation on a corporate level. However, shareholder may suffer double taxation when it comes to sharing of profits and dividends. Limited liability on the other hand are taxed at a corporate level, but where shareholders adopt a partnerships approach tax will be distributed to shareholders in relation to the shares (Segel, 2009). Conclusion In conclusion, having analyzed all the business structure in relation to their formation, asset protection and distribution of taxes it is advisable for an individual to opt for limited liability Company as the most suitable business structure. This is attributed to the fact that a limited liability company is recognized as a legal person separate from its founders. Therefore, it becomes quite easy to manage without interference from personal implication that may attach to any of the founders. Additionally, limited liability provide limited liability which ensures that that employees conduct their duties without fear of prosecution. This is attributed to the fact that employs cannot be personally prosecuted where they acted within their scope of duties. Additionally, limited liability companies offer the best and maximum assets protection, this is to say that should the company undergo financial difficulties such bankruptcy assets of the shareholders will in no way be affected. This is because when limited liability companies are faced with financial difficulties they undergo the process of receivership. Receivership is a situation where the company is placed under a caretaker who manages it finances and payments of debts. Additionally, taxes are levied at the corporate level, meaning that as a shareholder it is quite difficult to feel the effect of taxation. Therefore, considering all this factors it is advisable that the most suitable business structure is a limited liability company. References Bouchoux, D.E (2009). Fundamentals of Business Organizations for Paralegals, Third Edition (3rd ed.). Alphen aan den Rijn: Aspen Publishers Online. CCH. (2009). Australian Master Accountants Guide. Sydney: CCH Australia Limited. Corporation Act 2001. Retrieved from www.communities.wa.gov.au/...and.../corporations_act_2001_comm.pdf Curtis, V. (2012). Small Business For Dummies (4th ed.). New Jersey: John Wiley & Sons. Henderson, J.P (2009). The Small Business Self-Starter Handbook: How to Manage Pitfalls of a Small Business Start-up. Indiana; iUniverse. Fontana, P.K. (2010). Choosing the Right Legal Form of Business: The Complete Guide to Becoming a Sole Proprietor, Partnership, LLC, Or Corporation. Washington D.C: Atlantic Publishing Company Northcott, A. (2008). Asset Protection for Business Owners and High-Income Earners: How to Protect What You Own from Lawsuits and Creditors. Washington D.C: Atlantic Publishing Company. Segel, R. (2009). Retail Business Kit For Dummies (2nd ed.). New Jersey: John Wiley & Sons. Spadaccini, M. (2007). Business Structures: Forming a Corporation, LLC, Partnership, Or Sole Proprietorship. California: Entrepreneur Press Partnership Act 1963. Retrieved from www.legislation.act.gov.au/a/1963-5/current/pdf/1963-5.pdf Usa, U.I ed. (2009). New Zealand Company Laws and Regulations Handbook. Washington D.C: Int'l Business Publications. Read More