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Running head: Small Business Idea Paper

KC Gilbert Accounting 561 Small Business Idea Paper Individual Assignment, Week Two January 20, 2012 Presented to: Ms. Shamelda Pete

Small Business Idea Paper

I am excited the federal government has approved my request for funds in order to start my own business. There are many avenues a person can travel down when venturing into the business realm. There are many factors that must be considered when starting your own business. In this paper, I will discuss a myriad of topics to include the four types of businesses, advantages and disadvantages to each, and my own personal business topic and the reason(s) why I picked such a topic. There are four types of businesses: sole proprietorships, partnerships, corporations, and co-cooperatives. Each has its own share of strengths, weaknesses, advantages, and disadvantages. First we have sole proprietorships. These types of businesses are businesses that are owned by one person and usually have only a few employees. There are many advantages and disadvantages to this particular type of business. First and foremost, it is easy to establish. There isnt much to setting up your own business. From a legal standpoint, licensing fees are considerably less when a person wants to start their own business. Also, from a legal and tax angle, sole proprietors receive favorable tax treatment. One of the biggest advantages to owning your own business is that you are the boss, the sole decision maker. This is the reason that many people go into business for themselves. This eliminates the red tape with the creation of regulations, policies, etc. As for disadvantages, capital is sometimes hard to raise because the owner is liable for all of the debts. Another disadvantage is the particular skill set that is needed. Rarely do you find a person that not only has the business acumen needed to sustain him/her from a business perspective but also specific, specialized understanding of the service/trade being rendered. This can be a monumental problem. Another disadvantage is that the business must have unlimited liability insurance for company debts, liability, and overall customer safety.

Small Business Idea Paper

This segways to sole proprietors must maintain a certain amount of insurance in case he or she has a prolonged sickness or illness. As for taxes, all issues fall on the owner. This is not true with other forms because of the hierarchy includes multiple individuals at the ownership level. The financial statements most used by sole proprietors are balance sheets and income statements. The next form of business that will be discussed will be partnerships. Like sole proprietorships, there are many advantages and disadvantages with this form of business. Some of the same advantages that are associated with sole proprietorships are commonly associated with partnerships. They are relatively easy to set up. There are tremendous tax breaks received by partnerships. Another advantage is that with a partnership, there is a greater pool of knowledge, assets, resources, ideas, skills and energy when you have more than one person at the helm of the operation. Responsibility now shifts from one to several so this is also viewed an advantage. From a financing perspective, its easier to get funds because all parties in a partnership are responsible. There is also a better division of labor and skill in a partnership that is not found in other forms of business. Loan officers are more apt to grant loans because with a partnership, there is usually a greater pool of resources. As for disadvantages, its sometimes hard to find the right partner that shares your vision and compliments your skill set. Another disadvantage is that it is hard to determine who has what authority within the partnership. This should be something that is agreed upon and signed off by all parties in order for this agreement to be binding and profitable by all. Another disadvantage is that if one partner is fiscally irresponsible, all partners stand to lose money and property. Also, if a partner dies, it is sometimes difficult to dissolve a partners assets. As for profitability, common math says that the more partners you have, the less your profit will inevitably be. The financial statements most

Small Business Idea Paper

commonly associated to this form of business are balanced sheets, income statements, and retained earnings statements. The next type of business that can be used are corporations. With corporations, many of the laws established in the SOX ACT of 2002 were for corporations to have more transparency, high ranking officials signing off on certain pertinent information as it relates to the profit of the company, and greater authority given to regulatory agencies such the S.E.C. in order to make sure corporations are ethically competent. This form of business has a different set of advantages and disadvantages. A corporation is a group of associates (owners/stockholders) with the legal right to conduct business as one person would. A corporation can own property, buy/sell a product/service, contract with individuals/other corporations, sue for damages and in turn be sued. A corporation must be chartered by the state and is treated as an individual person with the same rights and privileges. They must apply for a Certificate of Corporation. Some of the advantages are Ownership transfers easy so to buy and sell stock shares is an easy process. As for authority, this is usually a Board of Directors so there are a number of people with a variety of abilities. As for liability, its limited to money they have invested in corporate shares so no personal property is at stake. As for disadvantages, corporations lack flexibility; they can only transact business as stated in the charter. Another disadvantage is that profits taxed twice; if a corporation makes a profit over a certain amount they are taxed. When owners get their share, they must pay income tax as well. The profits are shared according to the amount of stock owned. In addition, government control is strict. If stock is sold to public, original owners can lose control. FASB is always applicable to this form of business. All four financial statements are associated with corporations.

Small Business Idea Paper

The last form of business is co-cooperative. This is a business voluntarily organized, operating at cost, owned, controlled, and financed by member patrons sharing risks and benefits proportional to their participation. This form of business sells goods primarily with its own members, not with the general public as in the other forms of business organization. It seeks profits, not for itself but for its member entrepreneurs. As for advantages, there is limited liability, specialized management, continues after members retire or die, enjoys substantial tax advantages, capital is easy to raise, limited regulatory control. As for disadvantages, Incorporation statutes are quite restrictive. As we I the opportunity to start doggy daycare services, there are distinct advantages when considering which for of business out team will consider. S corporations provide a multitude of advantages and disadvantages that we need to consider when as we establish which type of business to pursue. From an advantage perspective, S corporations provide minimal to no risk of our personal assets as it relates to liability of the company. Theres also no corporate level income tax to pay with an S corporation setup. This will provide major savings for my business. In addition, there will be no corporate alternative minimal tax assessed to our business. These advantages create tremendous savings. As for disadvantages, the growth of my company will be limited as I would only be allowed up to (35) shareholders. Also, I will not be permitted to own subsidiaries, which not stifle expansion efforts. As for me operating under a C corporation status, this alternative will also provide multiple opportunities for this business. C corporations reap from lower tax rates, which may prove beneficial in the long run. Also, this is a form of business that is supported by investors and some venture capitalists. To the contrary, a severe setback is that income made is double taxed (corporate level and again when given out as dividends). An additional cost will of having separate accounting and reporting because of the

Small Business Idea Paper

special tax structure will impact our bottom line profit. These will be points that we have to consider when deciding which direction to travel for my business.

Small Business Idea Paper

References Abrams, R. (2003). The Successful Business Plan: Secrets and Strategies (4th ed.). : The Planning Shop. Herz, R. H. (2010, May). Accounting standards and bank regulation. International Journal of Disclosure & Governance, 7(2), 97-107. Kimmel, P. D. (2009). Tools for Business Decision Making (3rd ed.). : John Wiley and Sons, Inc..

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