Term Paper on "Accounting Choosing the Right Structure"

Term Paper 4 pages (1626 words) Sources: 4

[EXCERPT] . . . .

Accounting

Choosing the Right Structure for a New Business

A new idea for a business is the setting up of a mobile photographic studio. There are many individuals who want family portraits, or photos for identification or other reasons, who do not have time to go to a professional photographer

There are already a number of services where photographers will set up in a shopping centre to take family portraits of photos of children, or go to schools and take children's photographs to sell to parents. The new idea takes this a stage further, allowing a family to invite a photographer into there home for a set period of time, for a set price which will include a specific number of photographs. The idea of the convenience, as well as high quality of service, will create differentiation, with the aim of gaining business by recommendation. The business will be set up ion an areas where there are is a large population of middle and upper class families, and where a similar service is not easily identifiable.

In order to set up the business it is necessary to consider the practical implications associated with the different business structures which may be used to establish the firm.

2.

Forms of Business Organization

When setting up a business, the idea is only a part of the process. It is also necessary to consider the way in which the business itself will be set up in order to function. There are three basic structure which may be used; sole proprietor, partnership and corporation (Weygandt et al., 2011). Each of these structures has some implicit advantages and disadvantages; in order to assess which will be best for the new business idea each of these three structures can be examined to consider the advantages and disadvantages, including the tax implications.

2.1

Sole Proprietor

The first of the structures to be examined is that of the sole proprietorship. This is a very simple structure, it is where the business has a single owner that sets up and runs the business (Weygandt et al., 2011). The owner is self-employed and the business is an extension of the owner. This is a business structure that is commonly seen in the early stages if a business as it is easy to set up, it is also a structure common for small businesses, especially 'one man band' type of business, such as the independent plumber or electrician. The business is inherently linked with the owner, as it does not have any separate identity (Weygandt et al., 2011).

The advantage of this type if structure is that it is very easy to set up, involving starting operating and informing relevant authorities, such as tax the tax office, of the start up. It is also a business structure that is very ease to dissolve. The cost of setting up and maintaining the structure of a sole proprietorship is also relativity low. The profits from the firm are completely the property of the owner, and the owner can choose how to use or spend those profits.

The inherent link between the owner and the business is also a major disadvantage. As the owner and the business are insuperable this means that while the owner has 100% ownership of the assets, they are also 100% liable for the business liabilities (Weygandt et al., 2011). If the business fails, the owner will still have responsibility for the liabilities such as loans and other debts. This liability is seen as creating a potentially high level of risk, as if the business assets do not replay debts there owner will have to use personal assets. Raising capital for a sole proprietorship will also be challenging, as it is the credit position of the individual rather than the business which will be assessed.

The tax implication is relativity straightforward; as the business does not exist as a separate entity from the proprietor, it does not have its own tax records. The profits from the business are assessed as the owners' individual income, with the income and expenses of the business are shown in Federal Tax Schedule C. And profits are shown on Federal Tax Form 1040. The business is private and as such the application of SOX and FASB regulations mostly inapplicable.

2.2

Partnership

The partnership is similar to a sole proprietorship, but instead of a single owner, there will be two or more people who have come together in order to create and run the business (Clarkson et al., 2010). Partnerships are also a common form of business; examples include accountancy and legal firms.

There are some advantages associated with partnership. The structure facilitates different individuals coming together in order to create a business. This is also a simple structure to set up, although it is usually advisable for partners in a business to use a partnership agreement, in which the relevant roles, contributions and profit share are agreed (Clarkson et al., 2010). The structure may benefit those involved as it allowed for the combined resources of the partners to be brought together in an effective manner. With more than one person involved in the business as an owner, there is also an increased capability for raising capital (Clarkson et al., 2010).

The disadvantages associated with partners reflect the structure. Where there is more than one owner the responsibility and stress of running a business may be shared but there is also the increased potential for disagreements between the owners, disagreements may result in the death of the partnership if a partner decides to leave (Clarkson et al., 2010). Theoretically the business may survive, and change into a new sole proprietorship, or a new partnership without the old partner, but this is a risk. The partnership will also be dissolved if a partner dies (Clarkson et al., 2010). From a practical perspective the accounting of a partnership may be slightly more complex compared to a sole proprietorship, as with two or more owners there may be increased need for the use of external accountants or auditors, especially for large partnerships with a high turnover.

The tax implications of a partnership are similar to those of a sole proprietorship, as the profits each individual receives will be assessed as part of their personal income. The revenues and expenses for a partnership are reported on Federal tax form 1065.

2.3

Corporation

The last of the structures is that of a corporation. The corporation is a firm that is created and has its' own legal identity separate to the owners. The corporation will have shareholders; it is the shareholders who are the owners of a firm. Two types of corporation exist in the U.S., S-corporations are smaller business where there is a requirement for at least one shareholder, but a maximum of 100 shareholders (Clarkson et al., 2010). The C-corporation is the most commonly known, as it is not limited on the number of shareholders (Clarkson et al., 2010).

The separate legal identity of the firm is a major advantage for the shareholders. The business will own its assets and will also have responsibility for its own liabilities. This means that if a firm fails, the liabilities of the firm are not passed onto the owners, even if there are insufficient assets to pay all of the liabilities. The business, as an independent entity from the owners also has an indefinite life; if one owner wants to leave or dies, the firm is not dissolved. The firm also has the advantage of being able to raise capital by selling shares in the firm (Clarkson et al., 2010).

There are also disadvantages associated with the corporation structure. Firstly, setting up a corporation is more expensive than the alternate structure. Furthermore, there are additional maintenance costs which include the preparation and filing of… READ MORE

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