Term Paper: Small Business Uncovering Critical Success

Pages: 25 (6715 words)  ·  Bibliography Sources: 1+  ·  Level: College Senior  ·  Topic: Business  ·  Buy This Paper

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[. . .] Of these requirements, establishing a location from which a business will operate and the attainment of a certificate of occupancy is often the easiest factors with which to deal with. More difficult and important to survey are the requirements for licensing and identification of a business entity appropriately. The requirements regarding acquisition of a business license vary from state to state. Some states require that particular forms or business such as a liquor store acquire a license before operating. They formation of a business organization is also a key decision making process. A small business might fall into any of the following categories: sole proprietorship, Limited Liability Company, corporation or partnership.

A sole proprietorship is often the simplest and most uncomplicated type of small business. Generally a sole proprietorship is owned by one individual, traditionally operating under their own name. This type of business is generally unincorporated (IRS, 2004). Generally under a sole proprietorship the liabilities of the company are the same as an individuals personal liabilities, as such the owner undertakes all of the risks associated with conducting business. Sole proprietorships make tax issues easy, as the owner can file the expenses and income of the business on their own tax return.

The Limited Liability Company or LLC and Limited Liability Partnership (LLP) are a new form of business entity much like the sole proprietorship with added personal assets protection. An LLC can actually operate as a sole proprietorship, corporation or partnership. To operate as a partnership two individuals must be designated as owners of the company. An LLC can also have an unlimited amount of members. The LLP differs from the LLC in that it gives protection from any liability that might arise from the wrongful acts of any partners involved in the company. An LLC is easily formed by filing "Articles of Organization" with the Secretary of State (Davidson, 2000). One member LLC's are generally permitted in most states though this might create IRS problems in some states. In general creation of an LLC requires an Operating Agreement be written which contains information regarding how the LLC will be managed and how it will be taxed.

A partnership can also exist as an entity in its own; a partnership is defined as a relationship that exists between two ore more persons that will conduct business related to a trade, service or skill, where both entities expect to share in the profits and losses of the business (IRS, 2004). In a partnership each partner is required to file their share of income and losses on their personal tax return. Partnerships generally require the least legality in forming; a general partnership for example can be created by verbal agreement only; no documents need be filed with the state (Davidson, 2000). Generally a limited partnership may have no more than 35 owners.

A corporation is the most commonly known form of small business entity. A corporation involves the transfer or money and property between shareholders for the corporation's capital stock (IRS, 2004). A corporation has more tax liability than most other forms of business. Generally a corporation is considered a business entity with a 'perpetual life' and is therefore a tax paying identity (Davidson, 2000). Whereas in a limited liability company the individual member or members file taxes, in a corporation the corporation in and of itself is responsible for filing taxes. A corporation is created through filing of Articles of Incorporation with the Secretary of State (IRS, 2004). Whence this happens, shares of stock can be issued to shareholders and bylaws can be adopted. A board of directors must also be appointed to manage the corporation and appoint the positions of president, secretary and treasurer to manage the daily business of the company (Davidson, 2000). Generally a corporation is required to hold shareholder meetings, and any decisions that are made must be formalized in the form of written resolutions.

There is a subchapter of a corporation entitled as's corporation, which can be formed via special IRS election on the Articles of Incorporation. This election enables "flow-through taxation treatment' which is more similar to the tax treatment that a partnership or LLC might enjoy (Davidson, 2000). Much like an LLC, a corporation can be formed by one person only. An S corporation however is limited to only 75 members (Davidson, 2000).

Generally a new business is required to obtain an Employer ID number or (EIN). In a sole proprietorship, and EIN can simply be the individuals social security or Tax ID number. An EIN for a business is a federal tax identification number utilized to identify a business entity; generally a business will need an EIN to operate. EIN's are required if any of the following situations applies: (1) the company has employees, (2) the company operates as a corporation or partnership, (3) the company files tax returns related to employment, excise, alcohol or firearms, (4) the company withholds taxes on income other than wages paid to a non-resident alien, (5) the company has a Keogh plan, (6) the company is involved in the following: trusts, estates, real estate mortgage investment conduits, non-profit organizations, farmers cooperatives (IRS, 2004).

After establishing a formal tax identification number, it is critical when starting a new business to create a business plan, which delineates the factors that will impact the start up, development, management and operation of a business. Among other things, a business plan helps define a business structure, identify goals and serves as a resume for an organization (SBA, n.d.). Some important and necessary components of a business plan include a balance sheet, income statement and cash flow analysis (SBA, n.d.). A business plan also enables a small business to allocate resources and make business decisions. Organized and specific information about the company is often included on a business plan, including how the owner or owners plan of repaying borrowed money and conducting sales or interaction with suppliers and customers. According to Robert Krummer J. Chairman of First Business Bank in LA, "The business plan is a necessity. If the person who wants to start a small business can't put a business plan together, he or she is in trouble" (SBA, n.d.). The small business administration recommends reviewing the following four questions prior to creation of a business plan:

What service or product does your business provide and what needs does it fill?"

Who are the potential customers for your product or service and why will they purchase it from you?"

How will you reach our potential customers?"

Where will you get the financial resources to start your business?"

Source: SBA, N.D.

When it comes to creation and operation of a small business, financing also becomes an important issue. Financing can be accomplished through several avenues. Small business owners should be aware of the four main types of business loan programs available to small business owners including the following: (1) 7(a) Loan Guaranty Program, (2) SBA Micro loan Program, (3) 504 Certified Development Company Loan Program and (4) Small Business Investment Company or SBIC Program (Kilpatrick, 2002:1). The first type of loan, the 7 (a) is used for most general business purposes including the purchase of property for operations, equipment, construction materials and the purchase of inventory (Kilpatrick, 2002:1). This is they type of loan most often utilized by small business owners. The SBA also can offer a guaranty for small loans up to $150,000 and large loans that exceed this amount but for no more than 2 million dollars (Kilpatrick, 2002:1).

A small business in the process of forming might also consider obtaining a copyright or patent. A copyright serves to protect the authors of any original works of ownership; this is inclusive of literary, dramatic, musical and intellectual works, and the protection is available for both published and unpublished works (IRS-ILA, 2004). A patent is a similar protection afforded small businesses, and is basically a grant of property right to an inventor. A trademark is also valued by a small business. A trademark is representative of a word, name or symbol that is used in "trade with goods to indicate the source of the goods and to distinguish them from the goods of others" (IRS-ILA, 2004).

Savage (1998) conducted a survey of small businesses and identified seventy six mistakes that small business owners make, and that are important to consider when starting a small business. He notes that small businesses are audited more often by the IRS than any other group, and also are known to get into more trouble with the IRS than any other group (Savage, 1998: XV). Small business owners have numerous considerations to consider. They are in fact, liable for a majority of the decisions that large business owners are however small business owners often do not have… [END OF PREVIEW]

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