Small-Business Idea Paper
University of Phoenix
ACC 561

Small-Business Idea Paper There are numerous factors affecting the type of business organizations that an owner should form, so that it is most beneficial for him and the product or services provided. In this paper, the four business structures are evaluated and the association of the legal, tax and accounting implications with the different structures are also discussed. Suppose that the government has released funds to set up small businesses, I would set up a language services company. The services will include translation, transcription, interpretation, copywriting and proofreading. Most companies nowadays provide services internationally. It is, therefore, important to be able to understand each other, not only in English but also in the local language. The different forms of business organizations are evaluated first before deciding which form best suits the services provided. Sole proprietorship is the simplest business form and refers to a single person operating the business on his own. The advantages include the ease of establishment (most sole proprietorships can be started with a low initial capital), full owner control and tax advantages (Kimmel, Weygandt & Kieso, 2009). Legally, the sole proprietor is fully liable for everything in the business and if the business fails, he is fully responsible to clear all debts. In most cases, sole proprietors have favorable tax advantages because they just pay taxes over the business profits and if the business is operated from home, the costs may be deducted from income taxes. Because of the simplicity of this business structure and that the taxes are not paid from the business but by the owner, there is no requirement for extensive financial statements to be created (Tiwary, 2008). Since a sole proprietorship is not a publicly traded company, it is also not affected by the Sarbanes-Oxley Act (SOX Act). Sarbanes-Oxley Act is only applicable for publicly traded companies and its main purpose is to strengthen the accounting practices in U.S., including those in the Generally Accepted Accounting Principles (GAAP) (Auerbach, 2010). Partnership is similar to sole proprietorship, except that it is operated by two or more persons. Partnerships are usually formed to increase economic resources and/or to bring in unique skills or resources. Some advantages of partnership are the ease of establishment, shared control, broader skills and resources, and tax advantages (Kimmel, Weygandt & Kieso, 2009). The partners go into a partnership agreement and decide how to split the profits, the liabilities per person, and the responsibilities and roles of everyone. For example, in general partnership, each partner is liable beyond what he has invested and the profits and losses are passed on to each partner who will in turn report it in their individual tax returns, thus making general partnership not a taxable entity (Tiwary, 2008). All partners are liable to a certain amount of the entity’s debts and when a partner dies, the partnership agreement has to be re-negotiated because it does not provide continuity of life. In general, partnership does not require extensive finance statements to be created but they can create the balance sheet, income statement, cash flow statement and statement of partners’ equity for their own accounting purposes. Partnerships are also not affected by the SOX Act because they are not publicly traded companies. Corporations refer to a business owned by a separate legal entity owned by stockholders (Kimmel, Weygandt & Kieso, 2009). There are two types of corporations: “S” corporation and “C” corporation. “S” corporation refers to the corporation with less than 75 owners, following a subchapter “S” designation, which allows “a business to be taxed like a partnership where the profits and losses are passed through to the shareholders, although the owners are protected from debt liability (Tiwary, 2008). “C” corporation does not have a limit to the amount of owners and the corporation’s profits are taxed. It is, therefore, subjected to “double taxation”, which means that profits are taxed and shareholders are taxed on the dividends that are paid on the stock they own and any profits they receive on shares of stock that they sell (Tiwary, 2008).
The ownership claim in corporations is defined by the amount of shares owned and can be easily transferred by selling off the shares. Because individual share can be easily bought, raising capital is easier for a corporation than the other business structures, particularly in “S” corporations. In corporations, the stockholders are protected from the liabilities and debts of the company, although they pay higher taxes on the dividends received from the company. A corporation also ensures the continuity of life if one owner dies. A corporation has more legal issues to handle than the other business structures because it is large and publicly traded. Everything needs to be documented and filed and general meetings must be held at least per annum. All actions affecting the operations of the company, such as mergers and establishing new business ventures, must be discussed, recorded and filed. This also means that because corporations trade publicly, they are required to provide extensive financial statements such as the balance sheets, income statement, cash flow statement and retained earnings statement. They need these statements to attract more investors and increase capital. Corporations are also liable to the SOX Act. This means that they have to engage external auditors to audit their financial statements and the directors have direct access to the company’s financial information and are responsible that the company adheres to the auditing standards. For the automotive repair business that I would like to set up, I would choose the partnership business structure. This is because it is easy to set up and does not require a large initial set up capital. In this business, I can find trustworthy partners who are good in the automotive industry especially in the repair shop; with my knowledge in the supplier management area we would make a good partnership. The company would also not be liable to the SOX Act and be implicated for failure to adhere to the rules properly. The structure is also simple and the choice of business does not require a lot of capital, which means that the debts and liabilities will also be limited. Additionally, it provides tax advantages, which is beneficial for the business.

Reference Auerbach, M. P. (2010). Sarbanes-Oxley Act of 2002. Sarbanes-Oxley Act of 2002 - Research Starters Business, 1-6. Retrieved from http://ehis.ebscohost.com/ehost/pdfviewer/pdfviewer?hid=114&sid=322e5f4f-1c09-480a-b75b-947a37d3e16d%40sessionmgr113&vid=4

Kimmel, P., Weygandt, J. & Kieso, D. (2009). WileyPlus Course. Accounting (3rd ed.). Retrieved from http://edugen.wiley.com/edugen/student/main.uni

Tiwary, R.S. (2008). Types of Business Organizations -- Research Starters Business (p. 1). Great Neck Publishing. Retrieved from http://ehis.ebscohost.com/ehost/pdfviewer/pdfviewer?hid=23&sid=a7b65ea0-07e6-479a-a8df-ceae86298b93%40sessionmgr113&vid=7