Of all decisions one has to make when establishing a business, one of the most vital one is the
type of legal structure the business will assume. This decision will not only affect the amount
remitted as taxes, but also the amount of paperwork the business requires to do, the liabilities one
encounters, and profit-making ability. The type of business entity one settles for relies on three
key factors, taxation, liability, and record-keeping.
When selecting the type of business to run, there are several criteria critical to evaluate.
Amon the key aspects is legal liability. This consideration focuses on the extent a business owner
needs to be shielded from legal liability. When establishing a business one does not want to take
on personal liability for potential losses associated with the business. If one cannot afford the
risks of potential liability, a sole proprietorship can be a tricky selection.
In the given situation, the best option for incorporation is partnership because it involves
two parties. Partnerships occur in two forms; limited partnerships and general partnerships. In a
general partnership, the parties involved run the company and assume responsibilities for debts
and obligations (Stowers). However, limited partnership comprises both general and limited
partners. The general parties own and manage the business while assuming liability for the
entity. The limited partners are merely investors and have no control over the company and bear
no burden for liabilities as the general partners.
A major advantage of a partnership is the tax services it enjoys. Partnerships do not pay
taxes on income generated but pass through all profits and losses to enjoined parties. During the
tax period, every party file a Schedule K-1 form indicating their share of the business income,
tax credits, and deductions (U.S. Small Business Administration). While the honeymoon period
can be easy for a business, it is critical partners protect themselves and the business with a
partnership agreement to provide a guide when complexities arise. An agreement prescribes the
investments for every partner, their responsibilities, share of profits in case of adversity, terms
for withdrawal, conflict resolution and obligation for additional contributions.
The S-corporation tax status is more attractive for small-business owners that standard
corporations. The S-corporation has some pleasant tax benefits and offers owners with liability
protection of a corporation (Stowers). Using S-corporation, losses and incomes are shared among
shareholders and are listed on individual tax returns. Consequently, there is only one=level of
federal tax to service. Besides, businesses without inventories can use the cash method of
accounting that is simplified comparing to the accrual method.
Considering the cost of formation and ongoing administration, the partners will run the
business. Considering the tax advantages may not cater for the costs of running the business as a
corporation, the partnership approach offers reprieve. Besides, the partners will meet the high
cost of paperwork and record keeping. Running the administrative obligations consumes the
owner’s time creating a cost for the business.
When starting up a business, it is easy to be caught up in the moment. As one is
consumed in getting the business off the ground, it limits thoughts of what the business might
look like in the future. A partnership agreement can be critical to guide the business in the future
regarding the number of partners, inheritance in case of demise of a partner, terms for transfer,
and responsibilities of every partners.
Stowers, Joshua. "A Guide to Choosing the Best Legal Structure –
Businessnewsdaily.com." Business News Daily, 2020,
U.S. Small Business Administration. "Choose a Business Structure." Choose a Business
Structure, 2018, www.sba.gov/business-guide/launch-your-business/choose-business-