What forms of business organization will you establish?

Question

i.e. sole proprietorship, partnership, and corporation
Why did you choose this structure? Give at least two benefits this type of business organization has over other types of business?
Give 2 drawback to this type of business organization, and explain how you will overcome these drawbacks

Answer 1

When considering the establishment of a business, I would choose a limited liability company (LLC) as the form of business organization. An LLC combines many benefits of both partnerships and corporations, making it an attractive option for many entrepreneurs.

Benefits of an LLC:

1. Limited Liability Protection: One of the significant advantages of an LLC is that it provides personal liability protection for its owners (members). This means that if the business encounters debts or legal issues, the personal assets of the members are generally protected from being used to satisfy those obligations. This protection is similar to that of a corporation.

2. Flexible Taxation Options: LLCs default to pass-through taxation, meaning that profits are only taxed at the member level, thus avoiding double taxation that corporate earnings can incur. Moreover, LLCs have the option to elect to be taxed as a corporation if it benefits the business financially. This flexibility in taxation can lead to savings in tax liabilities ultimately.

Drawbacks of an LLC:

1. Self-Employment Taxes: One downside of an LLC is that members may be subject to self-employment taxes on the entirety of the business's income. Unlike a corporation, where owners can be employees and potentially pay themselves through a salary, LLC members typically have less flexibility in this regard.

   Overcoming This Drawback: To mitigate self-employment taxes, I could consider electing for the LLC to be taxed as an S corporation. This allows the business to pay members a reasonable salary while also allowing potential distributions that may not be subject to self-employment taxes.

2. Limited Life: An LLC may have a limited lifespan depending on the state where it’s formed, as some states require that the LLC dissolve upon the departure of a member. This can create uncertainty about the longevity of the business and its operations.

   Overcoming This Drawback: To address this issue, I would draft a robust operating agreement that outlines the procedures for adding new members and transferring ownership, thereby creating a pathway for continuity and stability in the business. Additionally, I can look into forming the LLC in a state with more favorable rules regarding the entity's duration.

In summary, an LLC offers a compelling combination of liability protection and flexible taxation, making it an enticing choice for many entrepreneurs. While there are drawbacks, they can be effectively managed with careful planning and strategy.