PART A ADVICE TO JOHN
City and State
May 27, 2018
Part A Advice to John
It is challenging to operate a new business venture in a competitive industry such as the fashion industry offering in men’s clothes. This requires an elaborate and strategic business structure that will guide the operation of the new business venture to be established. The business structure will outline a clear scope of business operations that will guarantee the success of the enterprise. The prospective investor in the small business must conduct an analysis of the fashion industry to determine if there is a business opportunity in the sale of men’s clothing. This will enable him to make a wise business decision, which will guarantee success in his venture. It is essential for John to select a business structure that will determine how his business will be formed and organisation (Burns, 2016). He must choose between four common business structures which include a sole proprietorship, a partnership, a limited liability company (LLC) or a corporation. With these options, John must understand that the different types of business structures have some factors that must be considered before selecting. For example, he must understand than the criteria for choosing the business structure depends on the investment needs, the types of liabilities and risks in each business structure, the incomes tax and the expenses and procedures that accompany establishment and running of the different business structures. It is essential to breakdown each of them in the different business structures.
The Four Business Structures
John should understand the four different types of business structures that should consider adopting in his new venture. These have been examined in the criteria and factors considered in setting up a business.
This is the most common and simplest form of a business structure since it has fewer formalities required when establishing and requires less capital. In this type of ownership, the investor enjoys the maximum independence and can withdraw his or her assets tax-free. In addition, the sole proprietorship has fewer legal controls, management has greater flexibility and fewer taxes paid (Burns, 2016). However, the proprietor has personal liability for the debts and losses incurred in the business.
In this ownership structure, two or more people are sharing the ownership of the business. The law does not distinguish the proprietorship between the business owners and the company itself. Also, there must be a legal agreement that outlines decision-making process, sharing of profits, how disputes are resolved and admitting future partners into the business. Despite this, the partnerships are relatively easy to form and run (Gitman, Juchau, & Flanagan, 2015).
Limited Liability Company (LLC)
The formation of an LLC is more complicated and formal compared to establishing a partnership or a sole proprietorship. It is expensive to start since legal formalities must be adhered to and addressed fully before setting up. In addition, profits in the business are differently shared based on the ownership interests, who are taxed based on what they have earned. The debts and losses are not traced to the business owners. However, running and maintaining the LLC is expensive since professionals must run the business (Burns, Mullet, & Bryant, 2016).
This business structure is complex and expensive to form since it has legal procedures that must be followed and required fees paid. The corporation is a separate legal entity, and its tax obligations are separate from the business owners. Additionally, the business owners are taxed when they take the salaries, bonuses and dividends from the business profits in a corporation (Blair & Marcum, 2015).
Criteria in Each Business Structure
In business, the business liabilities and risks are essential in determining the business decisions that an individual or organization is planning to venture into. Most business investors want a venture that carries less personal liability. Businesses that engage in risky and more dangerous business activities are likely to have less personal liability to the proprietors. John should consider if he would like to have a limited liability in case the business incurs losses. Therefore, the most appropriate that this client should consider adopting is the limited liability company or a corporation (Hatten, 2015). This is because the business owners in LLCs and corporations will have a type of limited liability that protects them against the claims made against their business since they cannot place personal liability in them. If John considers organizing his business as a sole proprietorship or a partnership, he will be health personally responsible for activities that the business did wrong. John should compare the business risks and liabilities in the four business structured before starting to set up his men’s clothing business.
It is essential to consider what you are trying to achieve in your business venture. John must consider his targets and goals in venturing into the fashion industry and whether these can be achieved in selling men’s clothing. John has to consider if he wants to have the sole ownership of the business or he wants to sell shares once the business is up and running. When a company is structured as a corporation, it will permit the owner to sell ownership shares in their businesses by offering stocks. This is a unique capability of operating a business as a corporation. The other business structures do not allow the business owners to sale shares or part of the business by offering stocks (Burns, 2016). Corporations have an advantage since can allow its owners to retain its employees and attract investors through the sale of stocks. If John does not wish to sell his business to the public and obtain investment incentives, which encourages employee retention, he should opt for the limited liability company, sole proprietorship or a partnership. Since the corporation can be offered on sale in terms of stock or shares, it has a lengthy procedure and also costly during its formation (Blair & Marcum, 2015). A limited liability company can be an option for John if he does not want to incur the expenses but still want to enjoy the advantages of a corporation.
Expenses and Procedures in Each Type of Business Structure
Investors must comply with the set procedures and legal policies that must be met in setting up a business. These procedures come with expenses and costs in establishing a business. The sole proprietorship and a partnership are some of the easiest business structures to establish since they do not require any special paperwork to be filled. Additionally, these types of business structures are not associated with any fees when establishing them or maintaining (Burns, Mullet, & Bryant, 2016). I would advise John to consider the sole proprietorship or a partnership during the startup if he has not strong financial muscle to pay for the procedures and expenses incurred in establishing a limited liability company or a corporation. It is more expensive and difficult to establish and maintain a corporation and an LLC. Setting up a limited liability company or a corporation requires filing an Article of Incorporation and the investor must pay the fees accompanying the incorporation (Blair & Marcum, 2015). The amount paid depends on the location of the business and the state in which John would like to set up his LLC or a corporation if he prefers these two business structures. Based on these procedures and expenses, I would advise John to establish simplest and easiest type of business structure, which is either a partnership or a sole proprietorship. This prevents lengthy procedures and expenses that he could incur when establishing an incorporation of a limited liability company.
A business must pay taxes on all its incomes and revenues and therefore tax planning is essential for John to consider in each type of business structure. Tax obligations are based on the business structures and this categorizes the income tax structures into two. One of the category is the one in which the business owners must pay income tax on profits made by the business. The other category includes business in which the business owners are not required to pay the income tax on business profits (Burns, 2016). The limited liability companies, the partnerships and sole proprietorships are types of business structures in which the business owners are expected to pay taxes. These are regarded as “pass-through” tax entities since the income taxes on the profits of the business and losses are traced through the owners of the business that will affect their personal income taxes. In addition, the business owners operating these three types of structures must report and pay the income taxes on all the net profits made by the businesses (Hatten, 2015). On the other hand, the owners of a corporation are not obliged to pay income taxes based on the net business profits in the corporation. The owners of the corporation can only pay taxes on the revenues they take from the corporation for example on the form of dividends, salaries and bonuses. John must considers these aspects of tax obligation in each type of business structure. Based on the tax advantage and tax obligation, John should consider operating a corporation.
In summary, John should consider all these aspects of business structures and ownership as he contemplates venturing into the fashion industry. Since he wants to start and run a small business selling men’s clothing, a sole proprietorship would be appropriate for him now. This is because he is new in business and therefore he should consider starting a business venture that is easier to form and run. It would be appropriate for John since he will have the independence of running and managing the business. The other three business structures the partnership, corporation or the limited liability company may not be appropriate since John has no other partners to start the business with. Therefore, he can start the small business as the sole owner.
Blair, E.S. and Marcum, T.M., 2015. Heed Our Advice: Exploring How Professionals Guide Small Business Owners in Start?Up Entity Choice. Journal of Small Business Management, 53(1), pp.249-265.
Burns, L.D., Mullet, K.K. and Bryant, N.O., 2016. The business of fashion: Designing, manufacturing, and marketing. Bloomsbury Publishing USA.
Burns, P., 2016. Entrepreneurship and small business. Palgrave Macmillan Limited.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.
Hatten, T.S., 2015. Small business management: Entrepreneurship and beyond. Nelson Education.