Business Entity Matrix Paper

Business Entity Matrix Paper

Exploring one’s entrepreneurship and starting a new business can be quite exciting. The idea of being your own boss and making all the management decisions is extremely appealing to many. However, there are many considerations and plans to make before actually starting the business. Aside from the obvious of choosing what it is one wants to do, a person must consider how to acquire the funds to start the business, what liabilities the company and owners may be exposed to and whether additional help will be needed to run the business.

Our current venture is to start a business of selling pet treadmills. One of our initial concerns is the startup capital needed. While we do have a healthy inheritance to utilize for startup capital requirements, we are also contemplating bringing in two friends on the venture. We must also consider the future of our business such as adding employees, franchise opportunities and international market growth. We know our first decision needs to be which type of entity to use to start the business. This decision will have a big impact on all these factors. Many people do not consider the business entity type until the business is already “up and running”. However, the entity type has a direct relation to the ability to raise capital and the amount of taxes paid by both the company and its owners. As such, careful consideration should be given to the potential needs of the business and its owners in making this decision. We must explore the pros and cons as well as the suitability of each type of business entity. To accomplish this we completed the attached matrix of the various business entity types which helped us in compare the characteristics of each type.

After careful consideration, we believe a limited liability corporation (LLC) would be most beneficial for our new business. A major advantage we identified is the liability for the owners is limited to the amount of money which the person has invested in the company (Business filings incorporated, what are the advantages of an LLC?). Additionally, an LLC may be started by one person or by multiple people and still have the benefits of limited liability, so it works well if we bring our two friends in as investors. While the members usually share equally in the profits, it is possible to amend the agreement otherwise. There is a major tax advantage as the LLC can elect to be taxed as a partnership or a corporation. Another advantage is that the LLC may be managed by its members or a manager may be hired to oversee the LLC (Business filings incorporated, how is an LLC managed?). The LLC is more difficult to set up than a partnership, and although it can be extended, the LLC must have a dissolution date listed in the articles of organization (Business, what are the disadvantages of an LLC?). Even with these possible disadvanatges, it still appears an LLC is the best choice for our endeavor.

As we now have the type of entity our business will be, we must now consider liabilities our company may be exposed to. First, the ultimate success of the business will rely on the product itself. From design to development to sale, the product must be safe and reliable. Failure in this area could mean losses due to returned merchandise or parts and labor for repairs under warranty and extend to more serious matters such as lawsuits due to injured pets (Product liability cases and lawsuits, Ð'¶ 2 ).

Marketing is also a key issue with a great risk for liability issues. The marketing methods (more specifically, the errors in marketing and advertising) can indirectly cause losses and damage. Take an example where a product is meant to be sold for $2.99 but is incorrectly advertised for $2.29. Does the company stick with the as advertised error and lose money on the sale or not honor the incorrect advertised price and lose a sale altogether? Magnify this several times over and a company “gains” an unexpected liability of sorts.

Another area of concern is in sales and shipping. If anything is to be shipped via mail/parcel carrier, the responsibility of getting the items to the customer can, in some cases, fall on the shoulders of the company selling the merchandise or become a question of who is responsible for the shipment (World Shipping Council, 1). This ties into the decision to support e-commerce; it becomes necessary to maintain a website/server. Many consumers will not shop via the internet without the presence of some security protection from the threat of identity theft (Privacy rights clearinghouse, 37).

At some point, we will probably need additional help to keep our business running smoothly. Some businesses have numerous areas that require personnel with specific expertise in each of them. The number of employees needed may vary depending on the task at hand, or how large the operation is. Some companies choose to hire independent contractors instead of actual employees. In some cases, hiring an independent contractor is more suitable for the task at hand than having employees on staff to perform the task. Regardless of the route the company decides to take, the company would probably need to use one of the two. Neither of the choices is undisputedly better than the other, because they both have advantages and disadvantages. An advantage to having employees versus independent contractors is the right to control. You can control the when, what and how an employees does there job, while independent contractors have more control over their own actions. When the company hires employees they have to pay wages, provide benefits, and also take care of tax issues concerning the employees. When companies hire independent contractors, they do not have to concern themselves with those matters. A company should examine their needs and chose the process that is most beneficial for them.

As shown, there are many considerations in starting a business. The entity type will help define the ability to raise capital, management control and taxation. Beyond that, it is important to anticipate potential liabilities the company could face. No less concerning is the decision to hire employees or contractors when additional help is needed in operations. Though starting and owning one’s own business is very exciting, it should not be approached lightly.

BUSINESS ENTITY MATRIX

Business Entity Issue

Characteristics Formation Liability Taxation Global Implications

Sole Proprietorship  Only one owner; not a legal entity

 Owner