Economic downturns can sometimes be unpredictable. Such events can create a significant change in the lives of numerous individuals. The most significant changes come in the form of job loss. Many need the income that an employer provides to sustain their households. This includes paying a mortgage, utilities, and other important expenses. The negative impact that is created when there is not a consistent form of income can be absolutely devastating. One of the most prominent economic changes of this nature occurred approximately a decade ago. Multitudes are still suffering the effects of The Great Recession from 2008. A considerable portion of these individuals includes the millennial age group. These young adults are having certain aspects of their lives delayed, such as purchasing a home or creating a family, because they don’t have the economic resources to do so. Underemployment and lack of job security are unfortunate circumstances that affect them.
Although they are facing certain obstacles, many are looking for ways to create long-term financial opportunities for themselves and their families. The millennial age group, or any other age group that was affected by an economic downturn for that matter, are turning to entrepreneurship to combat their financial difficulties. Becoming a business owner can provide many opportunities for those who are prepared to enter desired markets. Job security and stability are the most prized benefits that one can obtain through entrepreneurship. There are many forms of businesses that individuals can choose from, but they must do so wisely.
Below are the most prominent business entities that persons can form.
The Basics
Sole Proprietorship:
A sole proprietorship is an entity that is operated and controlled, in most cases, by one individual. This person oversees the entire enterprise.
Advantages
- This type of business is simple to establish.
- The individual has complete control of the business.
- Tax payments are not as vast as other forms of business.
Disadvantages:
- The individual in charge is entirely liable for debts and financial duties of the business.
- Investors may not be willing to invest in this type of business as others.
General Partnership:
A general partnership is an entity that is operated and controlled by two or more individuals. These individuals are responsible for the function and success of the business. Each of these individuals contributes to the success of this form of business through specific skills sets, financial investments, as well as labor.
Advantages:
- The taxes that come with operating this form of business can go through each partner. The profits and losses of the company are reported on each individual’s income tax returns.
- A general partnership is easier to establish than other forms of businesses. There is not a lot of paperwork involved when developing a general partnership.
- The fact that there is another individual that is helping run this form of business is an added benefit. This adds additional manpower by having a different perspective on how to run the business. This can become a powerful asset when a business is facing particular difficulties.
Disadvantages:
- Each partner is responsible for the liabilities and financial obligations that come with running a business.
- There is a significant increase in disputes and conflicts if there are disagreements between partners.
Limited Liability Company:
A limited liability company or an LLC is similar to a general partnership. The significant difference is that an LLC protects a partner from any liabilities that can occur, similar to what a corporation offers.
Advantages:
- The assets of partners are protected when faced with liabilities or any other concerns that the business is experiencing.
- Each partner can report profits and losses of the business through each partner’s individual income tax returns.
- An LLC has a better opportunity in obtaining loans for the business to operate than other business entities.
Disadvantages:
- An LLC does not last forever. When a partner leaves the company, the business entity is no longer able to operate.
- Profits can be taxed. LLC members must pay self-employment taxes, which includes Medicare and Social Security taxes.
Corporation:
A corporation is a legal entity that is separate from business owners. The legal entity operates the business and has certain responsibilities that it must follow in order for the company to function effectively. Shareholders own this entity.
Advantages:
- If a corporation faces certain difficulties, usually financial ones, owners of a corporation are not liable. Their assets are protected through liability protection.
- If major shareholders are no longer part of a corporation, the business entity can continue its operations for as long as it would like.
- A corporation can raise funds through the selling of shares.
Disadvantages:
- A corporation has many rules and other forms of regulations that must follow. Each state as different sets of regulations, so owners are highly advised to acquire assistance to be able to understand how to operate a corporation without running into any issues.
- Government entities monitor corporations, so owners must be able to operate their businesses effectively in order to avoid legal issues.
- Corporations usually require a certain amount of time and funds in order to be formed.
Limited Partnership:
A limited partnership is generally made up of a general partner and a limited partner. A general partner is responsible for managing a business, as well as sharing profits and losses. Although a limited partner is not responsible for managing the company, he or she not only shares profits but is also only liable for the losses regarding their investments.
Advantages:
- Establishing a limited partnership is typically more cost-efficient than establishing other business structures such as corporations.
- Pass-through taxation is available for limited partnerships, just like other similar business structures. Partners can report profits and losses on their individual income tax returns.
- Investments are made easier because of the liability protections that this business structure establishes.
Disadvantages:
- The general partner usually carries the most responsibilities. Therefore he or she is more susceptible to the liabilities that a business can bring, such as debts and financial losses.
- A limited partnership becomes extinct if a partner leaves the organization.
Limited Liability Partnership:
Similar to a general partnership, the difference is that within this business entity, a partner is not responsible for the other partner’s liabilities.
Advantages:
- The number of partners that can be part of this form of business can be unlimited.
- There is an incredible amount of flexibility that can be found in an LLP. Partners can contribute to the operation and function of the business in whichever form they deem fit.
- Just like other partnerships, partners enjoy liability protection. They are not held accountable for the debts and expenses that other partners have created.
Disadvantages:
- Many states do not recognize LLP entities. This can create certain tax limitations when creating this form of business.
Because partners do not have to disclose business dealings with other partners, this can create certain conflicts and misunderstandings.
Series LLC:
A series LLC refers to a business structure that allows the LLC to have multiple LLCs. For example, there is a principal LLC. This principal LLC controls or oversees the other, various LLCs. These LLC entities operate separately and posses liability protection from other LLCs.
Advantages:
- Assets of one LLC are protected from other LLCs that are facing liabilities.
- Establishing a series LLC is more cost-effective than forming a corporation.
- It is less complicated to operate a series LLC than it is to run a corporation with subsidiaries.
Disadvantages:
- The paperwork and management of a series LLC can become a challenge. Each separate LLC must have its own accounting.
- Not all states allow for the formation of series LLCs. States that permit this business structure include Texas, Delaware, Nevada, and Illinois.
Choosing the right structure for your business
If you are starting a business, there is so much that needs to be considered to efficiently create a business that will bring a significant amount of success to your life. Forming a company means knowing what business structure is best suited to generate profits and have minimal amounts of losses. Every single business structure has its advantages and disadvantages as we have just mentioned. You must think carefully, and analyze with high accuracy which structure is best for you and your goals. One of the most pressing concerns that most business owners face is based on the issues of taxation. Taxes can create a significant impact on the function of a business. There are business entities that can help owners manage and minimize taxation.
Another pressing concern is based on legal matters. There are business structures that are more susceptible to lawsuits and other liabilities. Other concerns that prospective business owners must consider is the amount of owners and the responsibilities that are given to them to operate a business. Also, administrative responsibilities that need to be followed for the business to continue to function. Laws and regulations need to be followed for a variety of business structures, and because of this, administrative duties must be completed with precision. These concerns are prevalent in all business structures, but certain structures can manage these elements of a business better than others. This is why we advise potential business owners to carefully analyze which structures are better suited to help their potential organizations maintain a level of harmony and experience the least amount of liabilities.
First Steps
Although prospective business owners may face certain hurdles in forming a business, once a wise decision is made, you can begin fulfilling the goals and aspirations you have set out to accomplish by becoming an entrepreneur. The first steps that must be made to establish an organization are filled with excitement, curiosity, and in many cases fear. Fear of the unknown is perhaps one of the main reasons as to why many individuals choose not to become business owners. We understand that making these steps are filled with uncertainty. You fear that your vision may not come to fruition. You may fear that the goals that you have set out to achieve may be stalled because any legal, financial, or administrative concerns that your business may face. You also perhaps fear that your business may fail. These are all legitimate concerns. When the correct advice and guidance is provided, the probabilities of your business facing such concerns are greatly reduced.
The Law Office of Yates and Associates is here to help you answer the questions that you may have in forming a business. If you are ready to make the leap in helping your dreams of becoming an entrepreneur turn into reality, don’t hesitate in contacting our associates to help you get started.
As we’ve mentioned, many individuals are turning into business owners in order to obtain a sense of autonomy. Although some may face certain uncertainties and concerns about operating a business, many take a leap of faith to achieve financial independence. When a business structure is formed correctly, the possibility of becoming financially independent is more likely. No longer will individuals fear that they may lose their employment because of layoffs or certain economic downturns. Being able to provide a great life to family and other essential individuals is undoubtedly a compelling reason as to why many choose the route of entrepreneurship. If you believe that a passion that you have may become an opportunity to start an enterprise, we will help you get started. It only takes the perfect structure to help transform your passions into a profitable and fulfilling business
