The Creation of Business Entities for Final Frontier

A business entity is a body established and run in accordance with corporate law with the intent to do commerce, charitable activity, or other activities. Organizations that are set up as a separate existence for the purpose of taxes are included in the category of business entities. There are several things to think about while selecting a business entity. Ability to raise funds is one of these. This is crucial since a corporate’s ability to raise capital depends on significant regulation. Limitation of Liability. In order to prevent being held responsible for a lawsuit, personal assets should continue to be shielded from potential company responsibilities. Another element is ownership transfer. The transfer is easier to C corporations and S corporation as compared to other entities. Tax treatment is also essential, and double taxation is an aching fact for many enterprises. The parting of ownership and management and ease of establishment of the entity are also aspects to be well-thought-out (Hanlon, 2015). This paper will look at the best business entity type for a final frontier.

There are various types of different entities. These are/; Corporations, Partnerships, Limited liability companies and limited liability partnerships(LLPs), General partnerships, Subchapter-S corporations(S-corporations), Sole proprietorships, Professional corporations(PCs) and Limited partnerships. A corporation is a separate legal and tax-free entity created by shareholders who offer money, property or both for its capital stock. The corporation remains distinct from the managers. Partnerships are divided into two; general and limited. In general partnership, there is dual possession of the business, equal right in organization and division of profits and loses whereas, in a limited partnership, there is one overall partner and one or more limited partners. Limited liability companies are regarded as a mixture of partnership and corporation. This is because they offer limited obligation of a corporation but have the tax benefit of a partnership. A sole proprietorship is a corporate functioned by one individual. The business is considered as part of the owner and not a separate entity. Profits are incorporated on the manager’s personal tax return and the individual maintains personal liability for the business outstanding amounts and litigations.

The different entities have advantages and disadvantages. For a sole proprietorship, the advantages include; ease of starting and cost-effectiveness since no filing fees are needed. The manager receives all profits, few documents are required to start an owner pays only individual income taxes on returns. The drawbacks are; the owner is responsible for all liabilities incurred by the business thus without enough assets to pay for debts, creditors can take the personal assets of the owner. Raising funds can be a challenge for the owner since it is limited to their pockets or well-wishers. Upon the owner’s death, the business might end. Merits of general partnerships include; increased ability to raise capital, a wider pool of knowledge, skills and network, improved management, ease of setting up and the business does not get taxed separately since each owner files the revenues or losses on personal tax return. Limited partnerships have the advantage of limited partner’s liability only for the amount of capital it contributed, ease of attracting investors due to limited accountability. Taxes on partners are own personal returns, and they share in profit and loses without having to take part in the entity. The disadvantage is the general partner is fully liable for debts of the business, certificate of LP must be filled with the state before the business becomes reality and the limited partner may have a general-partner special obligation. For a corporation, there is pooling of capital from many investors keeping the business on toes, shareholders are not individually liable for debts. Demerits are that Articles need to be filed with the Minnesota Secretary state and a filing fee, issue of double taxation where profits are taxed as earned at the corporate level as well as to shareholders when distributed as dividends. Stakeholders with majority shares have a dominant voice in management as compared to those who do not own much stock (Jux Law, 2015).

The best business formation entity type for Final Frontier is Limited Liability Company (LLC). This is due to the fact that, LLC is a hybrid of a corporation and partnership thus it offers the limited liability of a corporation but has tax advantages of a partnership. There are many advantages to this including; / liability of members is limited to a number of their investments, profits pass through LLC and taxes waged solely by titleholders of the company. Members are allowed to participate fully in management, there is no limit on the number of members and lastly, corporations and partnerships can be associates. An LLC can have one member and it offers huge suppleness whereby, shareholders can agree on how to control numerous business facets through operating consensus. There is also no requirement to hold an annual meeting like in a corporation where stakeholders must meet annually. As compared to the other entities, the only disadvantage to LLC is that there is increased complication in business creation. This is because LLC can be categorized as sole-proprietorship, partnership or a corporation for tax purposes.

References

Hanlon, K. (2015, OCTOBER 23). KIMBERLY M. HANTON, LLC A fresh approach to traditional legal dilemmas. Retrieved from 6 Factors to Consider When Choosing a Business Entity.: http://khanlonlaw.com/6-factors-when-choosing-a-business-entity/

Jux Law. (2015, March 9). Retrieved from Advantages and Disadvantages of Different Business Entities: https://jux.law/advantages-and-disadvantages-of-business-entities-mn-business-lawyer/