Financing in Business Sample Essay.
Business Structure and Financial Statements
While anyone can open a business, not everyone succeeds in business. Responsibly opening a business is important for success. When opening a business, one should first understand that there are key business structures to be used when opening the business. When choosing a business structure, one should also consider the advantages and disadvantages related to a specific business structure and how the structures should function legally. Financial statements or record keeping is important for the organization to be able to track the financial ability of the company, its income and a do lot more. This paper discusses the importance of appropriate legal business categories and financial statements as a critical element in making financial decisions.
Legal categories Advantages and Disadvantages
The three types of business organizations include sole proprietorship, partnership, and corporations. Theyare all legal categories of a business that have different tax-related advantages and disadvantages (Galbraith, 2014). A sole proprietorship is a business that is managed and owned by a single individual. It is a simple way to start a business. There is no much paperwork involved and is easy to maintain since the owner does not have anyone whom they must answer to. The sole owner makes all the decisions for the business and earns all profit. The advantage of a sole tax is that it follows simple tax procedures. The owner of the business is considered as a single individual,and the taxes are paid through the owner’s personal taxes. The disadvantage of such a business is that the owner is responsible for all critical matters like self-employment tax. Raising capital for such a business can also be difficult.
A partnership occurs when two or more people get into the running and management of a non-corporate business. The optimal goal of a partnership is to make aprofit. An agreement should be made to determine how the profits and losses will be shared and distributed among the partners. The advantage of a partnership is that it is an inexpensive form of business and few government regulations from the government have to be met. The income is only taxed at the partner’s personal level,and the business is also not subject to huge corporate taxes. The disadvantage of a partnership is that it offers no personal protection for partners of the business. A partner may be liable for negligent acts of that of another partner. For instance, a creditor could pursue a partner’s personal assets as compensation for the business debt.
A corporation is a legal entity which is separated from the manager and owner. The advantage of corporations is that it has limited liability, ease of transferring ownership, access to capital markets, and indefinite life. The disadvantage of a corporate business is that it is subject to double taxation. Filing state and federal reports aimed at registration corporation can also be a complex, time-consuming and expensive process. Later on, when the company distributes its dividends among shareholders, it must pay taxes on the dividends received from the business at the personal income tax rates.
Business Structure for my business
Since everyone needs clothing to be done regularly, I would consider starting a laundry Mat business. The demand for the product will guarantee consistent demands for the business. One challenge with starting the business is that the starting costs can be extremely high. The minimum starting cost for the business is going to be $125,000. I would choose a partnership for the business since it acts as a suitable way to finance the entire business. The funds could be acquired through the traditional loan and investment options. The financial investment cost would be averagely less than loans since investors could request for a partnership or a partial control of the business in exchange for no interest in payments. However, the long-term profits may diminish depending on the number of partners acquired throughout the course of the business.
Partnership for the laundry business would be suitable since it would provide a flexible business structure. This will enable the business to limit or expand liability and have an appropriate decision-making authority for the business. Partners will serve to improve access to the required capital and better management and division of the duties. Since I am not experienced in the full running of the business, having partners that bring different skills and experience in the business will help drive the business to success. I hope to take advantage of the tax advantages of a partnership because partnership taxation is like that of a sole proprietorship. Each partner will include their business income or their personal tax return and can deduct the business losses on the individual tax. This provides a pass-through advantage where tax and profit obligations are passed through the company partners,and income is divided based on the agreement.
Financial statements of the business
A partnership should follow appropriate the generally accepted accounting principles when creating financial statements and creating financial statements. Partnerships make use of income statements and balance sheets to measure the business profitability (Carraher and Van, 2013). The income statement for the laundry mat business would report each partner’s share of the net income would be reported separately on the income statement. The income statement would be used to show the revenues generated by the firm, the expenses incurred, and the resulting profits from partnerships. A written partnership agreement at the start of the business would be used as a guideline to divide the profits from the business.
The balance sheet of the laundry business will reflect the assets, liabilities, and equity for each partner. Assets for the business could include the laundry machine purchased while the liabilities would include partner loans taken to invest in the business. Partner equity would show the total withdrawals and contributions of each partner. The purpose of the balance sheet will be to access the level of growth of the business and find its current financial status. This will enable to access the business growth over a few years and access the viability of the business.
In conclusion, there are different types of business structures one can choose from when deciding to start a business. For a business owner, having the structure is important in assessing the future of the business. There are different tax-related advantages and disadvantages which each business owner should take into account. For the laundry business, having a partnership business structure would play a big role in the success. Advantages would include sourcing funds and expertise from the different partners.
Carraher, S., & Van Auken, H. (2013). The use of financial statements for decision making by small firms. Journal of Small Business & Entrepreneurship, 26(3), 323-336.
Galbraith, J. R. (2014). Designing organizations: Strategy, structure, and process at the business unit and enterprise levels. John Wiley & Sons.