Business Forms of Organization Essay

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Apex Training Company

A sole proprietorship is a business that has no separate legal entity from the owner. This structure made sense initially when the business was just Martha, working by herself. Whatever income that the business earned was income that she earned, so it flowed through directly to her. More important, the expenses associated with the business also flowed through. The result was probably some tax savings, because at that point the business was not making money, and Martha would not have paid income taxes.

Today, there should be concerns about running the business as a sole proprietorship. First, in most jurisdictions the corporate tax rate is lower than the personal one. At $4.2 million in revenue, there may be profit that is fairly significant. As the business grows, Martha will pay significantly more taxes on the company's income at the personal rate than if it was taxed at the business rate. But there are other concerns as well with the sole proprietorship at this point. One is that it is much more difficult to capitalize the business. The sole proprietorship structure simply does not allow for that.

The second thing is that there is increased risk associated with a sole proprietorship.

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A corporate training company might not have much legal risk, but if Martha were to face legal action, her personal assets could be at risk. If the business is incorporated, then the business would be at risk but her personal assets would not. The downside risk to Martha can therefore be limited by incorporation. . Furthermore, if Martha starts hiring people, then the business does not even fit the definition of a sole proprietorship, so at this point it seems reasonable that the business has outgrown this structure anyway, regardless of the downside risks inherent in it.

3. If Apex is structured as a partnership, Martha needs a partner. This does not appear to be the case. Furthermore, a partnership still has downside risk, something that Martha at this point should be trying to avoid. Additionally, business income still flows through to her for taxation, so again this is another issue that a partnership does not address.

An LLC is a corporate structure that limits the downside risk to the owner of the business. This is beneficial to Martha, but there are some drawbacks to the LLC structure as well. The biggest one is taxation. The LLC….....

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