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Types Of Small Business Structures Business Essay

Paper Type: Free Essay Subject: Business
Wordcount: 2380 words Published: 1st Jan 2015

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Small businesses are normally privately owned corporations, partnerships, or sole proprietorships. Small business employs over half of the countrys workforce. While many people think that new industrial giants are the most important factor in driving the economy, but small business is actually in the top.

Small business in all country has been the stabilizing force in the economy. Entrepreneurs are the backbone of creativity and production. Small business is what stimulates economic growth.

Every country has its own criteria to separate small businesses from the larger ones

Apart from number of employees other criteria for classifying a business as ‘small’ are:

Amount of capital employed

Annual Sales turnover

Value of assets


Types of Small Business Structures

Making the right decision about the legal and corporate structure of the business is critical to long-term success. How establishing the business will affect ownership rights, personal liability risks, and how operate the business. The following is a simple breakdown of some of the different types of business structures.

1. Corporations

Corporations are governed by a set of By laws, which are usually filed along with Articles of Incorporation. Corporations become a legal entity that “owns” itself. Corporations can have their own bank accounts, assets, and even secure financing. All tax-exempt nonprofit organizations must be incorporated

2. Limited Liability Company (LLC) (also called Limited Liability Corporation)

A Limited Liability Company (LLC) is sometimes also referred to as a Limited Liability Corporation, but the preferred term is “Company.” It is one of the simpler ways to start a business, and is becoming one of the most popular ways to structure a business. An LLC is not a corporation, but has some of the protection benefits that a fully incorporated business structure has.

3. Limited Liability Partnership (LLP)

An LLP is similar to a general partnership; however, in an LLP, each partner is not liable for the actions of other partners. If one partner dies, the LLP automatically ceases. There are many forms or partnerships that can be formed.

4. Sole Proprietorships

The sole proprietorship is the easiest way to form a business. It is subject to the fewest regulations of all business structures. For tax and legal purposes, the business is the owner. When the owner dies the business automatically ceases.

Starting a Business

Identify Your Business Opportunity:

Choosing what kind of business to start can be an immobilizing task when confronted with the multitude of opportunities. It’s important to determine where the passions lie. Yet, equally important is what skills you bring to the table and whether you are entering a dying industry or a fast growing emerging business.

Build a Business Plan:

For any start-ups, a business plan allows you to gain a better understanding of your industry structure, competitive landscape, and the capital requirements of starting a small business.

Find Start-up Money:

To start a business, you must invest in the business. The journey of finding start up funds will be different for each individual. Some start ups such as consulting, requires a few thousand to get a website and business cards whereas a retail store could need lots of money. Finding the money you need may come for a source you never thought of .

Name Your Business:

What’s in a business name? The right business name will help distinguish you from a sea of bland competitors, provide your customers with a reason to hire you, and aid in the branding of your company. Learn what you need to know to find a name for your business.

Choose a Business Structure:

Deciding on the structure of your business is not a decision to be taken lightly. Whether you choose the popular LLC, a sole proprietorship or form a corporation; your choice will have an impact on your business liability, fund-ability as well as taxes due. Don’t worry over your ultimate business structure, because as your business evolves, so too, may your structure.

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Get Your Business License and Permits:

Starting a small business requires the ordinary, yet necessary, paperwork and regulations. Depending on your chosen business structure, may need to register your business with the state authorities. Setting up your small business may require an employer identification number which is also used by state taxing authorities to identify businesses. Additional paperwork can entail sales tax licenses.

Set Up & Determine Your Business Location:

One of the multitudes of tasks in starting a business is the setting up of your office. There are many steps in office set up including where to locate your office (home or office space), buying the necessary office equipment, designing your work space and getting supplies.

Get Business Insurance:

As a new small business owner, you have the responsibility to manage the risks associated with your business. Don’t put your new start-up at risk without getting the proper small business insurance to protect your company in the event of disaster or litigation.

Create an Accounting System:

The accounting and bookkeeping aspect of running your business can’t be avoided. Setting up your accounting will help you understand the financials of running a business .

Advantages and disadvantages of small business

“This Following are the advantages and disadvantages of small businesses to their owner or operator as well as the economy in which they operate. Appropriate government policies to promote small businesses are also discussed.

Advantage of the owner

There is a relatively small amount of capital needed to start the businesses. This is a very strong point as banks might not be willing to lend large amounts of money to businesses that are new.

These businesses are good for those people who have experience in a field but do not have an adequate amount of resources. These resources of production could be land, labor, capital and enterprise. Enterprise is the risk taking ability of the owner.

Small businesses give the owner the freedom to choose the way they want to work, the office hours, when to take breaks during the day or when to take a day off.

The entrepreneur has complete right over the profit. He does not have to share it with other, unlike large public limited companies which have to give out the profits to a large number of shareholders in the form of dividends.

Entrepreneurs own business motivates him to work harder as he takes all the profits and is Advantages of the Economy

  They provide employment to a very large number of people. In some economies, they employ more than half of the total employees.

They act as competitors to larger firms which will help improve their efficiency and lower the prices offered to the consumers.

Small firms might come up with very innovative ideas which can lead to mass production of products and exports to foreign markets which has huge advantages for the economy.

Most businesses start with being small. Therefore there is an enormous chance that small businesses of today might become the market leaders of tomorrow and provide greater benefits to the economy.

Government Policies to Help Small Businesses

The governments should offer lower amount of corporate taxes for small businesses. Most governments do that.

Loans should be provided to these businesses which are free of interest or at very small rates of interest.

Grants should be given to small businesses for operating in underdeveloped areas of the country with high unemployment

The government should provide them satisfactory level of training so that the owners and employees could work more efficiently to make the business a success” [1] 

The importance and benefits of small businesses

Small businesses are vital to the success of the economy. Not only as they provide the success stories of the future, but also because they meet local needs. They serve the requirements of larger businesses. Being entrepreneurial simply means developing the right skills, attitudes and initiatives to make an innovative contribution to an organization.

Small businesses survive and prosper for many different reasons:

Developing personal relationships – small businesses are well placed to build personal relationships with customers, employees, and suppliers. With a small business you know who you are dealing with; you can ‘put a face’ to the person you are in contact with. Person-to-person interaction is as important as ever in building strong relationships.

Responding flexibly to problems and challenges – in a small business there is little hierarchy or chain of command. Large businesses may have set ways of operating and establish procedures that are hard to change. Small businesses are often far more flexible. It can also reach a quick decision on whether or not it can do what is required.

Inventiveness and innovation – small businesses are well positioned to introduce and develop new ideas. This is due to their owners not having to report or seek approval from anyone else.

Low overheads – due to the small scale of operation, small businesses have lower overhead costs. They operate in small premises with low heating and lighting costs, and limited rent and rates to pay. Low costs result in lower prices for consumers.

Catering for limited or niche markets -large firms with high overheads must produce high levels of output to spread costs. By contrast, small firms are able to make a profit on much lower sales figures. They can therefore sell into much smaller markets: a local window cleaner serving a few hundred houses, a specialist jewellery maker with personal clients.

The main reason many people choose to set up a small business, is because it gives them independence. They also reap the rewards for themselves; these are two powerful incentives


Small businesses face the following problems


A study conducted by the National Federation of Independent Business reported in 2008 that the primary problem that business owners face is the expense of running the business. The inability to control some costs, including health insurance, energy bills and inflation, add stress to the business owner’s bottom line.

In addition, the cost of paying employees, stocking inventory and basic overhead can create cash flow issues for the small business owner.

Time Management

Time management can become problematic for the owner of a small business. Small businesses often operate on a very tight budget, precluding the hiring of many employees. The owner is often faced with trying to manage and grow the business, while at the same time having to run the everyday operation.

Small business owners can also find themselves so tied up in running the business that they don’t take time to enjoy families, hobbies or other activities.


Refusing to let go of an idea and move on to something else is a common problem for small business owners, according to the Nevada Appeal. For small business owners to succeed, it is important for them to be willing to think like an entrepreneur and explore many different ideas. Whether it is the need to change inventory, provide additional services or move to a new location, a small business owner must remain flexible if he wants his small business to succeed.

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Obtaining Credit

Access to credit can be an issue for the small business owner, according to the Washington Post. A business line of credit can provide necessary cash flow during the start-up months. It can also ensure that the owner has the ability to fill the business with inventory and meet her payroll. A small business, however, will not always qualify for a large credit line, which can impede the owner’s ability to succeed.

Employee Issues

Small business owners often face a problem when it comes to hiring a workforce. Staffing enough workers to adequately cover the business needs without destroying the business’s profit margin can be a tricky process.

Under capitalisation

Poor debt management

Lack of managerial skills of the owner

Cannot retain experienced staff

Usually find it difficult to attract skilled staff

Poor stock management

How can small business survive

Small firms survive by being different (product differentiation). They can survive by

Segmenting the market by income. They can target niche market segments of high income customers, position their product as a ‘premium brand’ at a high ‘premium price’ eg Morgan sports cars

Small firms have the advantage of being able to respond quickly to change – they do not have the bureaucratic procedures often a feature of large firms where decisions are made only after endless meetings. This means they can be quick to exploit new market trends.

The Internet also allows small firms direct access to consumers, by passing intermediaries. The web gives small firms the opportunity of international marketing.

Small independent firms can join together to form a buying group to negotiate discounts on joint orders.

Small firms can survive by selecting a premium niche and offering an exclusive brand’ that exactly meets the customer requirements of their target segment. They will need to be totally customer orientated.

Keep well documentation for accounts receivable financing when unexpected expenses arrive. 


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