Understanding Business AND Business Structure.

WHAT IS A BUSINESS?

The term business can com from two perspectives;

1. It's an organization or enterprising entity engaged in commercial, industrial, or professional activities.

2.The term business can also be used to define the efforts and activities of individuals to produce and sell goods and services for profit.

Note 1: In choosing a Business there are things you must put in to consideration;

1. The kind of Business

■ in the place of production

■ or rendering of services

2. The Business Structure.

WHAT IS A BUSINESS STRUCTURE ?

A business structure is a legal representation of the organization of a company.

It defines who owns a company and how the business distributes its profits. You’ll need to have a business structure in place before registering your business with local, state or federal governments. Choose carefully because changing to a different business structure later can be restrictive and costly. You may want to consult with a business counselor, accountant or attorney before making your decision.

Note:  The kind of Business you will want to venture in to will determine the kind of Business structures to venture in to..

Such as:

1. Sole Proprietorship

2. Partnerships

3. Corporation

4. Limited liability company. (LLC)

3. THE BUSINESS LAWS OF THE STATE.

This talks about the stipulated guidelines or rules of a particular state or governments concerning business establishments.

BUSINESS STRUCTURES:

There are 4 major Business structures ventures by business entities

1.Sle Proprietorship

2. Partnerships

3. Corporation

4. Limited liability company. (LLC)

In choosing each of these business structures based on the kind of production or services rendered you will need to put the following in consideration..

This considerations will help you know the kind of Business structure suitable for your business

1. The cost of running the company

2. Limitations of liabilities

3. Tax benefits

4. Number and nature of stakeholders.

Note:  when all this are put into consideration you will now determine the kin of Business structure to chose for your business

Let's explore each of them in details:

1. Sole proprietorship

In a sole proprietorship structure, one person owns the business and runs its operations. It is the most common business structure because it is the simplest to set up. If you plan to work alone, this may be the right structure for you. Keep in mind that in a sole proprietorship, you, as the owner, are personally liable for all of the business's financial obligations such as debt and losses.

This structure works well for low-risk, home-based or retail businesses. A sole proprietorship can also allow an owner to test their business idea before creating a more formal company.

Advantages of the sole proprietorship structure include:

Complete control: As the sole owner, you have authority over all business decisions and do not need to consult with other partners, directors or shareholders as you do in other structures.

Easier start-up: Establishing a sole proprietorship business does not require you to fill out any forms or pay government fees.

Simple tax reporting: Since the business isn’t considered a separate entity, expenses and income will be included on your personal income tax return. As an added benefit, you can use business losses to balance out the income you otherwise earned, which can lead to a higher tax return. The self-employed tax credit also may be available.

Privacy: Sole proprietorships do not require filing annual reports with state or federal governments. Therefore, your business will not be subject to public disclosure unlike other structure types.

2. Partnership:

In a partnership business structure, two or more people own and operate the business. There are two types of partnerships:

General partnerships:

The partners hold an equal role in owning and operating the company as well as liability for its debts, other partners’ actions or financial obligations. This type of business structure is also known as a “limited liability partnership (LLP).”

Limited partnerships:

A limited partnership (LP) includes general and limited partners. The general partners hold the same role and liability as they would in a general partnership. The limited partners, usually investors, have limited control or input into the company along with limited or no liability. Profits are reflected in personal tax returns.

A partnership is the simplest structure for multi-owner companies or professional groups. It also allows owners to test a business idea before establishing a more formal company

Advantages of the partnership structure include:

Simple startup: Setting up a partnership does not require filing paperwork with the federal government, though there may be a few forms to fill with your state government.

Few tax forms: In a partnership, the business does not directly pay tax on its income, which means you do not need to file business tax returns. Instead, the profits and losses pass through to the individual partners' personal income tax returns.

Shared finances: Having a co-owner can reduce the financial burden of starting a company since the partners can split purchases and overhead costs. Also, banks are more likely to offer loans to multi-owner businesses, which will also help in the early stages of financing your business.

Combined knowledge: Having a partner can help grow your business by providing skills or expertise in areas where you are less familiar. They also bring another perspective for decisions about how to run the business or other important issues.

3. Corporation:

In a corporation, the company is considered an entity that is independent of its owners. This makes it more complex and expensive than most other business structures since it must comply with more regulations, record-keeping and tax requirements. You may want to choose a corporation structure, also known as a “C corp,” if you have an already established medium- or high-risk business, need to raise funds, have plans to take the company public or sell it.

Advantages of corporations include:

Liability protection: Owners are not held responsible for a corporation's debts so personal assets—such as your car, house and savings—are protected. As an independent entity, a corporation can file and receive lawsuits, but you are not personally liable for such legal actions.

Continuity of business: Corporations base ownership on the percentage of stock held, so the business can run without disruption even if a shareholder leaves or sells their shares. This also allows for more flexibility in transferring ownership.

Quick capital: Corporations can raise funds by selling company stock and offering shares as employee benefits. This, in turn, helps grow the business and support it in times of need.

Tax exemptions: Though owners pay a double tax on business earnings, corporations can deduct certain benefits provided to employees such as retirement plans, health insurance premiums, life insurance and other related expenses.

Other corporation types.

There are several other corporation types, including:

Benefit (B) corporation: This corporation type is a good choice for for-profit businesses structured to make a positive impact on the environment, society and such.

Closed corporation: Also known as a “privately held company,” this corporation type has few shareholders, is not publicly traded and has limited liability protection.

Open corporation: Open corporations offer stock for trade on a public market. The corporation owns the company.

Non-profit corporations: This corporation type is for companies that do not focus on making a profit. The business is tax-exempt since it serves to help others.

S Corporation: The S corporation business structure has the liability protection of a corporation along with added tax benefits, making it more appealing to small businesses. However, it must meet specific IRS criteria to be listed as an “S corporation.” This structure, also known as an “S corp,” has two limitations: it cannot have more than 100 shareholders, and its shareholders must be United States citizens. S corporations can only sell common stock, which lets shareholders elect the board of directors and vote on company policies.

Becoming an S corporation requires:

—Meeting eligibility requirements

—Having a single class of stock

—Having 100 or fewer stockholders

Advantages of the S corporation structure include:

No double taxation: Business profits and losses pass directly to the shareholders' personal incomes and appear on their tax returns. This means the S corporation only has one level of federal tax to pay and shareholders not subject to corporate tax rates.

Liability protection: Shareholders in S corporations are not held personally responsible for the business's debts and liabilities. This lets them protect their personal assets, such as bank accounts or property, from creditors.

Simple ownership transfers: An S corporation is an independent entity and shareholders can sell their shares without tax consequences. The business can also continue to run undisturbed when losing a shareholder just as it does in a corporation.

Cash method of accounting: While a corporation must use the accrual method, S corporations without inventory can use the more simple cash method. In cash accounting, you record income when you receive it and expenses when the invoice is paid. Accrual accounting records revenue and expenses when you earn them, regardless of whether you have received cash or payments.

Limited Liability Company.

A limited liability company (LLC) is a hybrid business structure that lets you take advantage of aspects of partnerships and corporations. To set up an LLC, you must file paperwork with the secretary of state of the state in which you plan to do business. This structure works well if you have a medium- or high-risk business, want to protect your personal assets or pay a lower tax rate than you would with a corporation.

Advantages of the LLC structure include:

Limited liability: Because an LLC is an independent entity, you are not personally responsible for debts or lawsuits filed against the company. If the business goes bankrupt, your personal assets will be protected, though you may lose the money invested into the business.

Pass-through taxation: Rather than paying corporate taxes, the company's income and expenses pass directly to the owners' personal tax returns. They will then pay income tax on the profits. Since the owners are considered self-employed, they may claim the self-employed tax credit. It is their responsibility to contribute to Medicare and Social Security.

Added shareholder participation: An LLC can have an unlimited number of shareholders, and those shareholders can fully participate in the company's operations. This structure provides more flexible management than a corporation, which uses a board of directors to oversee policies and officers who manage daily operations. Keep in mind, though, that some states may require the LLC to dissolve and then reform if an owner joins or leaves the company.

Flexible distribution of profits: Unlike a corporation, an LLC does not need to dispense its profits to shareholders based on the number and type of shares they hold. Instead, owners can decide how to divide profits. For example, a shareholder who contributed significant funding during the startup process could receive more profits even if they have equal shares as another participant.

How to choose the right business structure.

You have outlined your business plan and researched different business structures and now, it’s time to choose. However, your new company fits into more than one type of business structure, so how do you choose the right one?? Here are six factors to consider when choosing a structure.

1. Control: If you want primary control, consider a sole proprietorship or LLC. Partnerships bring in others, but their control can be detailed in the partnership agreement. Corporations require a board of directors.

2. Capital investment: Corporations can source funding—such as investors and bank loans—by selling stock or securing more funding. Single proprietorship use their own credit or take on partners. An LLC also has difficulty raising funds, but it’s not always necessary for the owner to use their personal assets or credit.

3. Flexibility: Review your goals and business plan, then compare how each structure aligns with your plans. The structure should support growth and change, not limit its potential.

4. Complexity: Sole proprietorship is the simplest business structure, but it can also be hard to find outside funding. Partnerships require signed agreements for roles and profits. Corporations and LLCs must report to state and federal governments.

5. Liability: Determine how much personal liability you want to carry. A corporation has the least amount of liability since creditors or customers can sue the corporation but do not have access to your personal assets. An LLC has the same protection and tax benefits. Partnerships share liability between partners. In a sole proprietorship, you carry all the financial liability.

6. Taxes: Determine how much you will have to pay in taxes. Sole proprietorship and LLC owners pay personal income taxes. Partners claim their share of the profits as personal income. Corporations file their own tax returns, paying taxes on profits, but they also have more tax options and exemptions.

This article is an major extract of the free business class hosted by Joseph Prince (Pst.) He is the Pastor of Sovereign Assembly, Port Harcourt, under the umbrella body of the Rhythm 5 Fellowship International.

Pst Joseph Prince is a seasoned man of God and a passionate business man whose calling bothers on influencing and raising youths for kingdom wealth and success.

He is the host of IMPACT BLT. A group that he created to reach and coach young people into wealth creation. His classes hold every Tuesday, 9pm via Zoom call. If you would be interested in joining his group, please indicate in the comment box.

Once again, it's my pleasure bringing you value. Thank you for your time.

CN Humphrey.