Business Organization Analysis - Essay Example

The enthusiasm of starting a consulting business for providing consultancy to non profit organizations to help them with strategic planning, fundraising, employee management, service delivery, marketing, and other non-profit functions has taken a back seat at the moment. Currently I am more concerned with the legal and financial structure of my own consultancy. There are a number of factors to be considered which would ultimately dictate which the best entity for starting my own consultancy is. There are a number of forms in which the consultancy can be started, they are: Sole Proprietorship- Partnership Corporation S Corporation Limited Liability Corporation (LLC) Limited Liability Partnership (LLP) Choice of the organization will depend upon the following major considerations: Creation - time and cost involved Continuity - Stability of the business Management - Control decisions Liability - Limited or personal of the owners Taxation - of the organization and in the hands of the promoters The choice of the organization for my consultancy after considering all the above factors is narrowed between Limited Liability Company and Limited Liability Partnership. To begin with my inclination is to start with LLP. I would discuss with all the interested classmates draft an agreement specifying at least the following points Capital Contribution of each partner Share of profit of each partner Geographical / segment wise division of work for better managerial control Buy and Sell agreement for arriving at the value of withdrawing partner's interest Names of general partners Names of limited partners The agreed terms would be signed in the form of a partnership contact amongst the partners. A registration certificate would also need to be filed with the secretary of the concerned state This form of organization would be advantageous for the following reasons: Very easy to commence once the agreement is reached amongst partners. Cost of formation is not very high Tax would be paid by the partners not the partnership. Thus initially when the revenue is low or there is no profit, tax advantage would be with us. No license would be needed to commence business as ours would not be a firm governed by any professional body like that of accountants or lawyers. Governmental supervision and litigation is also expected to be low for partnerships. As is clear two types of partners are seen in this organization- General Partners and Limited Partners. General Partners- Those classmates of mine who share my vision of providing consultancy to Non Profit organizations to help the start up their activities, raise necessary funds, staff them and set up their legal structure, marketing support etc. They would compliment me and we would divide work segments, each of us specializing in one or two areas so that there is no conflict of interest and the partnership flourishes as a result of team effort. They would also bring capital as agreed before commencing the business. They would also be jointly and severally liable for any legal suits brought against the partnership. Limited Partners- They are my friends who have full confidence in my project and are willing to back me up by providing the necessary funds for starting and running the business venture. They have already committed the funds as asked by me. None of them is interested in day to day running of the organization but still would like to have a say in the general direction, internal matters like admission or expulsion of other partner, agreeing on terms of partnership, etc, so they would be limited partners, their liability would be limited to their share in the partnership. General public would not be aware of their role in the partnership and we'll have to take care not to include their name in the name of the partnership or they will lose their limited privilege. As is obvious from the discussion above the funds needed for our organization would be financed mainly by the partners themselves in the form of their capital contribution. The general partners would have to actively participate running the consultancy, but the sleeping (limited) partners would only contribute their capital and share the profits as per the terms of the partnership. It would not be a trading firm so raising debts from banks or other financial institutions for financing working capital is not foreseen. We will see to it that the costs are kept low and any increase will match expanding revenues. I have briefly touched upon the various considerations which have helped me decide in favor of LLP they are elaborated below: Creation- Creating an LLP would be very easy. It involves entering into partnership contract preferable in writing, filing a registration certificate with concerned secretary of state. In case if our business expands beyond the state boundaries, we would have to file certificates in those states as well. Thus the cost in terms of money and time is not all that prohibitive for an LLP. Other compliances which we might need before commencing our activity could be, obtaining occupation license for the business premises, property assessment for payment of property tax, registration with labor department etc. Continuity - Though technically partnerships dissolve on death or resignation of a partner, the issue of continuity would be resolved by having a buy and sell clause in the partnership contract specifying the formula for arriving a the value of share in an eventuality so that the share can be paid off and the business can be continued with the remaining partners. In case of exit of a limited partner, the business can be continued by simply assigning his share to the remaining partners. In any case revised certificate would have to be filed with the secretary of the concerned state(s). Control- Control over running of the business would be as specified in the contract. We would avoid conflict by assigning business segments as per interest and expertise to each of the general partner. Conflict with the limited partners over management is not foreseen. Only if the business does not do well will they be concerned. Thus we would have to ensure that they get due return on their investment and they are informed about the performance periodically. Liability- this has already been discussed in detail in the previous section. We can say briefly that liability of the non managing partners is limited unlike that of the managing partners whose liability is unlimited. Thus they are safer for the inactive and sleeping partners. Tax - For tax purposes LLPs are not treated as separate entities, thus the entire profit or loss is allocated to the partners and clubbed with their other income for calculating the tax liability. Thus in case of a loss in partnership, the loss would help reduce the tax burden of the partners by decreasing their total income to the extent of their share in the partnership. Probably we would also need to pay state income tax withholding on employee wages, taxes on gross receipts, as per the law of the state we commence our business in. Read More