Different Ways of Structuring a Business - Essay Example

DIFFERENT WAYS OF STRUCTURING A BUSINESS STUDENT’S NAME: INSTITUTION: INSTRUCTOR’S NAME: DATE: Different ways of structuring a business Before starting up a business entrepreneur should consider many aspects that will contribute towards the success of a business, therefore he will have to make decisions on how these aspects will enable the smooth running of the business. One of the main aspects an entrepreneur should consider before making general decisions concerns the structure of the business. Structuring a business highly depend on the situation of the business such that it should be able to fit the environment of the business. A business structure defines the level of ownership such that each structure will have its characteristics. There are different types on which a business should be structured. These types of structures differ, and each structure defines a certain type of business. The nature of the business dictates how it will be structured; also, personal situation determines business structure such that one will decide which structure will suit their business (Carrington, 2012). Different types of business structures Sole Proprietorship- this is a type of business structure whereby it is owned and operated by a single person. The owner of such business is responsible for all the assets and liabilities. The owner is in control of the business and therefore he is the main contributor of capital. It is the simplest form of business because it is owned and operated by a single person. There is no distinction between the owner and the business and therefore the owner is entitled to all the losses, profits and liabilities of the business. It does not require any legal action for its formation but since before starting any business, one should have all the required permits and the license for the smooth operation of the business (Carry & Ronald, 2011). An example of a sole proprietorship type of business is tutoring whereby an individual offers lessons to students at a fee, freelance writing is also another example. Advantages of a sole proprietorship It is easy to form; this form of business structure is the simplest and the easiest to form, it is also cheap because it does not require legal procedures when forming. Many business people prefer this type of business structure because it is easy to form. A single person forms ownership control; since the business, there is an advantage of ownership control whereby the owner controls all the activities in the business. The owner is in full control such that he does not need to consult any other person when making decisions. Easy to prepare tax; when it comes to preparing taxes it is easy for the owner to fulfill the tax requirements because they are taxed at a lower rate and also the tax comes from the income of a sole proprietor. Disadvantages of a proprietorship Unlimited liability; the owner of the business can be held liable for the debts and obligation owed to the company; this is because the sole proprietor and the business are not legally separated. Difficulty in raising capital; the owners of this business structure always encounter challenges when it comes to raising capital for a business to run smooth. Let’s look at the bank’s that are reluctant to offer loans for a sole proprietor because they lack credibility when it comes to repaying back the loan. Challenge of the heavy burden; since not all businesses experience success at the same time, the owner of the business is entitled to the entire burden that arises due to losses caused by business failure. Partnership- this is a form of business structure that is formed through contract, in this case, the structure consist of two or more members who come together and form a business. Partnership form of business structure has to be formed in such a manner that all the members share equal responsibilities when it comes to liabilities. They form the business and run it by contributing their resources and developing an uniform objective so that they have a common goal that unites them. Limited partnership is a type of partnership consisting of some members who have less interest or liability in the business. Therefore, there are no equal responsibilities when it comes to liabilities of the company (Richard & Michael, 2010). When it comes to the ownership of this type of business structure, there should be one general partner whose capital contribution is higher than those of the rest of the partners. An example of a partnership is a real estate’s whereby people pull their resources and invest in real estates. Advantages of a partnership Easy and cheap to form; this type of structure is easy and cheap to form because the majority of the time that is needed to form the partnership will only be spent in developing business agreements. Shared commitment; this is an advantage that encourages many people to join partnership, because there is sharing of commitments that include financial commitments. They pool their resources together and use these resources to achieve their desired goals. Employees get incentives; partnership provides employment opportunities, and they also give their employees an advantage of being part of the partnership. Disadvantages of partnership Sharing of profits; since partnership is owned jointly, it is a disadvantage when it comes to profits because all the partners should share the profits equally. Therefore, if there is an unequal distribution in terms of resources and time, it becomes a disadvantage to the contributor. Partnership disagreements; when there are many partners; disagreements will often arise and will pose a challenge to the business. Therefore, there will be time wasting when resolving disputes. Individual and joint liability; this form of business is responsible for all the liabilities; therefore partners are also liable for their actions and also for the business. It is a disadvantage because the assets that belong to the members will be used to repay the debts of the business. Companies- this is a business structure where the people responsible for its formation will have to operate as a legal entity. The company is responsible for its assets and liabilities and therefore it owns all the business. The structure is self-explanatory because the members will have a limited liability, and this is an advantage to them. It is formed by two or more people who share a common goal. Advantages of companies It is easier to form; partners are subjected to less liability such that the business will protect its members when there is an issue to do with debts. There is minimal work of keeping records; the operations of the Company are less such that there is less record keeping. Also, its formation does not require much paperwork and therefore makes it easier to maintain records. Considerable sharing of profits; this comes as a fact that some members may contribute more than other members, therefore when it comes to profit sharing, those with high contributions will be considered. In other words, profit sharing depends on the individual contribution. They have lower tax rates therefore they enjoy their profits The business can grow because it is not entitled to any member; therefore termination of one member will not affect the business. Disadvantages of Companies It has more regulations when compared to other types of structures It requires larger amounts of capital because it is a large combination of members The directors who from such companies are required to have an insight of their responsibilities to avoid confusion. Trading trust - this is a business structure whereby the members hold the wealth of an individual until the time to claim it. Limited Liability Company is the only trustee of a trading trust. When one wants to own a private asset, the structure to be used is the trust. However, it is complicated to run a business as a trading trust since it requires some legal issues for example consulting a lawyer and accountants. Reflective statement Through my experience on ensuring that this assignment was completed it was a difficult task because I had to do more research on these types of business structures. The process I undertook in writing an essay involves researching for contents from sources such as a book from the library, the internet and also from visiting some certain businesses and inquiring the type of structure used. When searching for contents, I encountered a challenge whereby I had to compare the contents from different books so as to come up with appropriate information concerning the business structures. This therefore means that I had to be having books and other sources from a different source so as to compare them. Sometimes I could visit the library and found that these books were not available and therefore I had to be punctual when going to the library, also, you may find that most students are in need of these books and therefore it becomes a challenge. There are also at times when I could not differentiate between these business structures and therefore I was forced to consult from my colleagues as well as forming group discussions to help me further understand them. There was a time when I felt so sad because I visited the library and could not find any book since the business books were on high demand; I opted to do my research using the internet but was also disappointed by the fact that the network was very low. I could not get any content and was forced to wait for students to return the books. Also at the start of the assignment, the most challenging situation was that of being unable to locate business books in the library, it was due to the library assistant that I was able to search for the books. I found out that the most discouraging factor on completing an assignment is the fact that one is not able to understand the question. Therefore, what I will do the next time I am given an assignment to complete, I will first make sure that I am able to understand the question. This is because once I have understood I will be able to look for the right contents and therefore will be in a position to tackle the task. Another lesson acquired from the experience of researching for an answer to the question is that of keeping time, especially when it comes to going to the library. This was a challenge that resulted to a lesson because the more you delay, the more you will not get access to the library books. Also, it is important to know the procedure for searching books in the library because it might be a challenge for someone who is new in the library. All these challenges are lessons and therefore the next time I am given assignment; I am sure I will face less challenge. References Read More