Starting a business is an exciting and equally scary experience, which can also leave one feeling confused. Although some business owners have knowledge of legal business structures, the majority of the people starting businesses are not fluent, which can make the navigating process challenging. Virtually, within the legal business structure, there are four structures; sole proprietorship, partnership, corporation, and limited liability corporation (LLC) (LinkedIn Learning Solutions, 2014). In light of the case study, and consistent with the needs of the business, we propose the suitability of a sole proprietorship and a limited liability corporation for the soon-to-be-opened bakery.
Sole Proprietorship vs. Limited Liability Company
A sole proprietorship is one of the common business structures among business owners. The owner has direct control over the business and enjoys all the profits. A sole proprietorship also has various limitations (LinkedIn Learning Solutions, 2014). For instance, it is hard for the owner to raise money since there are no shares within the business. The type of business structure also offers unlimited liability, and in case the owner is sued, there is a high risk of losing personal assets. Nonetheless, it is recommended as it is the easiest way to begin for starters.
On the other hand, a limited liability company is a legal business structure that provides the limited liability characteristics of a corporation, tax efficiency, and operational flexibility (LinkedIn Learning Solutions, 2014). The business structure is one of the most effective for business owners who want to protect their business from liability. Personal assets are protected since risk is on business. The business structure also has a few disadvantages. Firstly, the business structure is complex to form and demands great expenditure. It is also subject to scrutiny and regulations from a lot of organizations such as the IRS.
Consistent with this knowledge, owner of the soon-to-be-opened bakery should consider starting a sole proprietorship but convert it into a limited liability company. By doing this, it means that business creditors cannot go after the owner’s personal assets to settle debts. For tax purposes, the owner can apply to pay taxes as a sole proprietor, to avoid the burden of taxes.
LinkedIn Learning Solutions. (2014, July 24). Exploring business entity types | Small business | lynda.com. You-Tube. Retrieved from https://www.youtube.com/watch?v=UEGkczPJJ9Q
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