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Small Business Idea

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Small Business Idea

Forms of Business Organizations

Sole Proprietorship

Sole proprietorships are single-owned and self-controlled businesses. They are common predominately because they are easy to start. There isn't an invasive legal process to get these types of organizations up and running (Kimmel, Weygandt, & Kieso, 2009, p. 4). An additional advantage is tax benefits aimed at encouraging small business growth and success. Sole proprietorships often get tax breaks and benefits that corporations do not since taxes are reported with the individual and not separately (Kimmel, Weygandt, & Kieso, 2009, p. 5). The prevailing disadvantage to this form of business is liability. Owners are responsible for all debts of their business, which means that in the event the company fails or even simply takes a while to become profitable, the owner must carry the debt

Partnership

Like sole proprietorships, partnerships are fairly easy to establish. Another benefit in partnerships is that another owner can assist with financial resources and/or contribute their unique skills and abilities to enhance the business (Kimmel, Weygandt, & Kieso, 2009, p. 4). This form of business organization also does not pay income taxes because they are filed with the owners' taxes. Tax benefits are also given to partner-owned business as well. While partners can share debt liability, this asset is also a disadvantage since owners remain personally responsible for financial debt (Kimmel, Weygandt, & Kieso, 2009, p. 5).

Corporation

Stock can be sold easily to raise money and generate a system of stockholders who are owners of the business (Kimmel, Weygandt, & Kieso, 2009, p. 4). In addition to having the ability to raise capital quickly, corporations are also more likely to need less financing from other means. And, when additional funding is needed, corporations stand a better chance of qualifying for loans. Overall, one of the greatest strengths of corporations is the owners' protection regarding debt liability. Corporations are more protected and are often not accountable for more than their initial investment (Kimmel, Weygandt, & Kieso, 2009, p. 5). Major disadvantages include generally higher income taxes (both corporate and personal) and the required formality and policies required for corporate businesses.

Limited Liability Company and Partnership

Owners of a limited liability company (LLC) are legally separate from their company so their assets are protected if the business has to pay unsettled debt. This is one of the major advantages of this type of company over sole proprietorships and partnerships. LLC owners also get some of the taxation benefits as single business owners in that they only file taxes on their personal income. However, all owners of the LLC must file this way, not just one individual. Another disadvantage is that owners cannot pay themselves any wages. They can use profit distribution, but can't earn a typical salary like partners and sole proprietors can. Additionally, owner(s) must also pay self-employment taxes.

As the name implies, limited liability partnerships (LLP) also protect owners from the same type of financial responsibility at the personal level as the LLC does. In addition to this, LLPs also shield partners from each other. Wrongdoing by a partner or employees that report only to that partner, are only the responsibility of that partner, rather than the firm as a whole. Taxes are paid individually, along with self-employment taxes; the partnership does not pay taxes as an organization. Some states view LLPs differently for tax purposes and also for the types of businesses that are legally allowed to form LLPs.

Types of Financial Statements for Business Organizations

All forms of businesses develop the four main types of financial statements: income statement, retained earnings statement, balance sheet and statement of cash flow. Businesses use Generally Accepted Accounting Principles (GAAP) guidelines for compiling financial documents (Kimmel, Weygandt, & Kieso, 2009, p. 22). While non-profit organizations may seemingly not need these statements, because their information is publicly released (for investors, etc), they are generally still used.

Income Statement

This reports a business' revenues and expenses - an overall picture of an organization's success during a set period of time. This document states whether money has been gained or lost. While many factors are important to consider from other statements, the income statement (IS) contains the simplest answer to the question, "How much did we make?"

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