Small Business Analysis Week 2

Small Business Analysis
Lindsey Brito
ACC 561
Small Business Analysis

There are four different types of business organizations that are popular among small business owners; sole proprietorship, partnership, C-corporation and S-corporations. Tax, legal and financial reporting may vary from organization to organization, so finding the right fit for your services and or products is crucial.
Sole proprietorship is the most common form of business. It is the simplest and most inexpensive business to form. Sole proprietorship consists of one individual owner who is entitled to the full profits, but is also responsible for any debts that the company may incur. There is no formal action that needs to be taken in order to form a sole proprietorship.
Sole proprietorship is not only the easiest and inexpensive business structure to start, even in the legal aspects the cost is small; just obtain the appropriate license or permits to operate. Although with simple start up and minimal costs there are some disadvantages to having a sole proprietorship. Sole proprietorship also means that there is unlimited personal liability, since there is no legal separation between the owner and the business. Raising money is also another challenging aspect in a sole proprietorship, since you cannot sell stock in the business that often means that investors are unlikely to invest. Obtaining bank loans can also prove challenging, since most banks are hesitant to loan to a sole proprietor for fear of failed repayment.
Balance sheet is the statement of the financial position of a business at a specific point in time. The financial position of a sole proprietor is showcased by the amount of the assets held, liabilities and the amount of the owner’s capital. Income statement is also utilized by a sole proprietorship, income statement reports earnings from a specific period of time. Revenue is categorized as increases in owners’ capital from the sale of goods and or services. Statement of cash flows illustrates where cash came from and when it went during a period of time. Statement of cash flow also accounts for how much cash was on hand from the start to the end of the period.
Partnership is composed of one business and two or more people who share ownership. In partnerships each owner will back all aspects of the business; which include money, property, labor and skill sets. In addition to all owners contributing to all facets of the company, profits and losses of the business are also shared.
Partnership consists of three types of partnership arrangements; general partnerships, limited partnerships and joint ventures. General partnerships operates under the assumptions that all responsibilities of the business is shared equally among all of the partners. Limited partnerships allow for partners to have limited liability along with limited input regarding management decisions. Limited partnerships are most appealing to investors of short-term projects. Joint ventures are composed similarly to general partnerships, the only thing that varies is the amount of time. Usually joint ventures are only for a limited amount of time for a single project.
Similar to sole proprietorships, partnerships are easy and inexpensive to form. In a partnership, since it is composed of two or more individuals that often means that the financial commitment is shared among the owners. Since each partner is equally invested in the partnership it is typically easier to combine resources in order to obtain money. Since there are two or more partners within a partnership this will usually mean that everyone is bringing something different to the table. This is beneficial in terms of utilizing strengths, resources and skill sets of each partner. Partnerships often cultivate a highly motivated work environment when it comes to employees. Partnerships can offer a chance for an employee to become a partner, hence attracting highly motivated employees.
As with sole proprietorship there are also some drawbacks to partnerships. Partners share full liability; partners are held responsible for their own actions, but also share responsibility for debts, and business decisions that are made by the other partners. If there are outstanding partnership debts, personal assets of all partners may be utilized to pay off debts. As with any team, there can sometimes be disagreements or ideas of how business decisions should be executed. Partners have others that they need to consult with in order to make a collective decision regarding the business, this sometimes means making compromises in order to come to a resolution. Since partnerships are jointly owned, that means that profits will be shared regardless of the time, effort and resources that each partner contributes.
Partnerships also utilize the balance sheet which reflects assets, liabilities, and partner equity. Cash flow statements are also used in order to show cash inflows and outflows in regards to operations, investing and financing. Income statements are composed to show revenues that have been generated, expenses and partnership profits. One financial statement that is solely used by partnerships is capital account statement. The capital account statement keeps record of all contributions and distributions to each partner in the capital account.
When a corporation is formed potential shareholders will interchange money and or property for the corporation’s capital stock. Corporations will usually take the same deductions as a sole proprietorship may take in terms of taxable income. Corporations are also permitted to take special deductions for federal income tax means. A C corporation is accepted as a separate taxpaying entity, since C corporations are considered separate entities they are actually taxed twice, once at a corporate level and then they are taxed again at when it is dispersed to owners.
Much like a partnership a C corporation permits numerous owners. C corporations also allow for lower tax rates on the first $75,000 of income, which makes it a beneficial structure if you have a small business. C corporations have limited liability, unlike sole proprietorship and partnerships they do not run the risk of losing all of their personal assets. Shareholders are only financially responsible for the amount that they invested. Raising capital is much easier for a corporation, in comparison to sole proprietorships and partnerships. The reasoning behind this is because a corporation has stocks that they can sell, thus attracting investors. Fringe benefits not only assist in attracting qualified employees. Fringe benefits entail life insurance, health and disability insurance and death benefits, C corporations can deduct these fringe benefits. In the event that one of the owners passes away it will not alter the corporation.
C corporations are taxed twice, as discussed earlier. C Corporations are governed by state and federal statutes, which means that there are specific and sometimes complex laws that the corporation will need to ensure it follows. Lawyers and tax preparers will need to be brought on to ensure that these statues are being followed. Regular stockholder and board of directors meetings are also required to be held and detailed minutes of those meeting have to be recorded. Corporations are also met with fees that vary from state to state.
Unlike the C Corporation that is taxed twice, the S corporation allows this type of corporation to be only taxed once instead of twice. The way that S corporations avoid dual taxation is by allowing their shareholders to report flow-through of profits and losses on their personal tax returns, by doing this they are taxed at their individual income tax rates.
As discussed previously S corporations have tax saving advantages. S corporations also experience business expense and tax credit, there are some expenses that shareholders and employees are able to write off as a business expense. Much like the C Corporation, in the even that a shareholders perishes or leaves the corporations, the corporation continues to operate and does not alter.
S corporations operate under stricter operational processes. According to "U.S. Small Business Administration " (n.d.), “S corporations require regularly scheduled director and shareholder meetings, adoption and updates to by-laws, stock transfers and records maintenance. S corporations also require shareholder compensation requirements.”
Both C corporations and S corporations utilize balance sheets in order to see the company’s assets, liabilities and ownership equity at a given point. Income statements are utilized across the board for all four organizations. Income statement is a comprehensive statement of revenues and expenses, this financial statement provides information on the operation of the company. Statement of cash flow is yet another financial statement we see across the board, which showcases inflow and outflow of cash.
I chose a cleaning business for my small business. My cleaning business will cater to retail stores and corporate office buildings for regular cleaning that is done before or after business hours. I would operate my cleaning business as an S corporation, due to the tax rate of corporations. Also limited liability, as an owner I would not be personally responsible for debts or liabilities.

References
Arthur, L. (n.d. ). Advantages & Disadvantages of a C-corp or S-corp. Retrieved from http://smallbusiness.chron.com/advantages-disadvantages-ccorp-scorp-21120.html Calcangni, D.A. (2010). Revisiting an old friend: Financial planning for C corporation employee shareholders. Journal of financial service professionals, 64(2), 6-13.
IRS . (2014). Retrieved from http://www.irs.gov/Businesses/Small-Businesses-&-Self
Employed/Corporations
Kimmel, P.D., Weygandt, J.J., & Kieso, D. E. (2011). Accounting: tools for business decision making (4th ed.). NJ: John Wiely & Sons
Ruhnke, K., & Schmidt, M. (2014). Misstatements in financial statements: The relationship between inherent and control risk factors and audit adjustments. Auditing: A journal of practice & theory, 33(4), 247-269. Doi:10.2308/ajpt-50784
U.S. small business administration . (n.d.). Retrieved from https://www.sba.gov/content/s corporation U.S. small business administration . (n.d.). Retrieved from https://www.sba.gov/content/partnership Wrigth, T. C. (2015). A guide to preparing general partnership financial statements. Retrieved from http://smallbusiness.chron.com/guide-preparing-general-partnership-financial- statements-74775.html

References: Calcangni, D.A. (2010). Revisiting an old friend: Financial planning for C corporation employee shareholders IRS . (2014). Retrieved from http://www.irs.gov/Businesses/Small-Businesses-&-Self Employed/Corporations Kimmel, P.D., Weygandt, J.J., & Kieso, D. E. (2011). Accounting: tools for business decision making (4th ed.) Ruhnke, K., & Schmidt, M. (2014). Misstatements in financial statements: The relationship between inherent and control risk factors and audit adjustments