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Business Structure and Financial Statements

Business Structure and Financial Statements

If you want to be your own boss and grow in the business world, then opening a business would be the best option. Anyone can choose to do this, but everyone involved must know there options and the essential documentation needed. The person selecting to pursue opening a business would want to go through some of the disadvantages and advantages of each type of structure they could choose. The options include sole proprietorship, partnership, LLC, and corporations. Once a person has selected the right structure for there business then it is essential to know how to operate it legally through proper documentation. Financial statements are needed for record keeping for the company to track their assets, financial ability, income and more.

Advantages and Disadvantages of Legal Categories

Business structure is a general word that is used to describe groups of organizations which are legally registered under law following a given jurisdiction and characterized legally under certain category to conduct commercial activities (Rogers, 2012). There are several business structures which operate under law to carry our business activities to satisfy the demand and supply of goods and services for consumers. The most common business types are sole proprietorship, partnerships, corporations and limited liability companies (Garzon, 2014).

Every type of business structures has their advantages and disadvantages. The two simplest are Sole Proprietorship and Partnerships. Sole Proprietorship is when you plan to operate the business alone. Advantages to this are that it is low cost and has little legal requirement to start it up. There are also simple taxes at the end of the year. The disadvantages of this are that you are reliable for everything and work alone. There are no protections to personal assets, so if there is significant debt that will not be able to be paid back, lenders can come back and take everything.  A Partnership is an arrangement between two parties that states they are co owners of the business. Some advantages to this that there are no legal formalities and no business taxes. Also, it can be less stressful as you have a partner to collaborate with ideas and business plans. There is also combined capital when starting up which can be very helpful. Some disadvantages can include the share of profits, more liabilities, the risk of joint responsibilities and delay in decision making. There also is the possibility of disagreement to different elements like person work ethic, personality, and how they would run the business.

The more advanced business structures are Partnerships and Limited Liability Corporations(LLC). Corporations has more advantages than disadvantages because it is a fully functioned business organization that has many workers. There is no liability to the employee except everyone must comply to all policies and guidelines issued by the organization. In addition, the company provides incentives such as medical and dental benefits, vacation and sick pay, possible bonuses, 401K plans, etc. However, there are some disadvantages of working for corporations. For example, the company may shut down due to bankruptcy which leave workers unemployed. Also most companies are considered “at will” in which a worker could be terminated at any given time without notice. Limited Liability Corporation is similar to regular corporations but have different legal entities. Again there are more advantages then disadvantage to this type of structure. Some advantages include a member is only liable for the amount of the investment. Profits can be distributed to members without the double taxations, personal income can receive dividends. Can also pass-through entity for taxes.

Own Personal Business

If I were to start my own business, I would choose a partnership. I would need to have a formal agreement that would define the relationship and operations of the business. Since I do not have a lot of experience, I prefer to have someone close to me that has experience and can teach me as we go. Having a partnership means that there is both personal and joint liability which means any liability will be severe towards both parties so trust and communication would be required. It is most beneficial to have a limited partnership because if there were conflicts that caused a loss, I would only lose the amount that I have invested. I am a very cautious and think about any consequences that could happen so I want to make sure I take calculated risks so that I can learn and grow from any obstacles that the business may come across. I would want to be an equal partner in the business, which means I want to take part in every decision in order to grow on by opportunities and grow and offer my strengths. If the company is thriving, then I would invest more to build it up to the next structure.

Financial Statements

“A partnership must follow generally accepted accounting principles when reporting its financial transactions and creating financial statements” (Rogers,2012). To accurately report these transactions, the business must create and maintain four critical financial statements that allow for them to measure and report the performance of a company. Those included are the balance sheet, the income statement, the statement of equity, and the statement of cash flows. The balance sheet is needed to record assets, liabilities, and partner’s equity.  The income statement shows what income is coming in and what expenses are getting taken out of the investment.  The statement of equity shows how much money the business has after all the debts have been paid. The Cash Flow Statement shows how much money is coming in and how the money is going over a time period.This often Indicates that the business can cover its obligations.

Conclusion

When starting a business, there are several types of organizations to choose from which include sole proprietorship, partnership, and corporations. A sole proprietorship is a business that is owned by one person. Two or more parties are considered a partnership. Then there is a corporation, that means they have more more taxes, more employees, can enter into contracts and be sued or sue someone else. There are many disadvantages and advantages of each structure which plays a role in how a person can decide on what type of structure they would open a business. Once selected, financial statements help companies to keep track of how money comes and goes out. It enables you to keep track of assets and liabilities along with the net income of the company.

Reference:

Brooks, R. (2016). Financial Managment: Core Concepts (3rd. ed.). Pearson.

Garzon, M. (2014, July 31). Running a Web Design business: Defining your Business Structure. Retrieved from Lynda: https://www.lynda.com/Web-Design-tutorials/Running-Web-Design-Business-Defining-Your-Business-Structure/163952-2.html

Ginsberg, L. (1998, Aug 31). How to pick a business structure that works. The Globe and Mail.

Rogers, T. (2012, Nov). Bank market structure and entrepreneurship . Small Business Economics, 39(4), 909-920.