Business structure is a crucial factor in the operation and success of any business. That is because business structure affects managerial decisions, financials, taxation, and liability (Sisney, 2018). Like any other entrepreneur, Billy needs a well-calculated approach to tackle the problems of business transitions smartly. In this particular case where a sole proprietorship is transiting to a formal business structure, Billy has to take an interest in a couple of important legal issues. This paper discusses the optimum business and legal frameworks that Billy could enforce or avoid to secure a sustainable transition, as well as safeguard the named interests.
Business structure and Licensing
Concerning personal liability protection, Billy’s business would best operate a limited liability company (LLC). Far from protecting him from being personally responsible for losses of the business, LLCs are relatively easier for a single person to manage (Mancuso, 2017). Also, the LLC business model with his small pool of workers, and a relatively small capital. Besides, studies have proven LLCs to be the least complex in terms of tax administration and managerial costs, hence Billy will also be able to customize the business’s tax structure (Bush, 2016). Another apparent benefit of the LLC is better consumer trust and credibility with established lenders. To register an LLC, Billy is required of the organization’s article, which is the supreme document validating the existence of the business. This means that he has to have a name for the entity, and legally, it will end with LLC, for instance, Wildermon Rafting LLC .
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Tax issues
Limited Liability Companies do not fall in any federal tax classification but instead, default to formation structure. In this case, Billy’s company will be recognized by the Internal Revenue Service (IRS) as a sole proprietorship, since Billy is the sole founder. In the dilemma of whether to file tax as a corporation or an S corporation, Murray (2019) prefers the latter for two reasons: First, registering as an S corporation will allow Billy to report the firm’s incomes/losses at a personal level, thus avoiding double taxation. This requires him to file a Schedule K-1, which is a prerequisite for filing form 1120-S. Secondly, transfer of ownership procedures for S corporations are fairly lax, compared to C corporations. It is also possible that the company will file additional paperwork to comply with tax rules defining operating loss. In such a case, the company may be exempted from tax in the event of sustained negative returns
Funding and non-profits
It is possible for Billy’s ‘Trout Unlimited’ to qualify as a tax-exempt non-profit. To safeguard his prospects with international funding, there are two takes to Billy’s plan: to qualify the LLC as a non-profit, which leads to obtaining a federal-exempt status. Here, priority is given to tax exemption, since non-profit is state-defined and does not offer excellent prospects for an ambitious person like Billy. The sure way to obtain a federal tax-exempt status from the IRS, and then seek election to be taxed as a corporation. In retrospect, it will have to dedicate its assets to tax-exempt purposes y the IRS, that is, if the company’s members are 501(c)(3) compliant (Martins, 2020). This is a helpful prerequisite for hedge funds from international partners, disguised as donors.
Equity
About offering equity to employees, it is well established that an individual cannot be identified as both an employee and an owner ( Grigore & Gurau, 2017 ). However, there are three avenues Billy can explore to give equity to employees while still preserving the individual’s designation an employee. First, he can form a separate leasing company, have the company sign them up, and then lease the workers to the first firm. In this case, the leasing company is treated as a C corporation (Taft Laws). Alternatively, he could use S corporations, formed and owned 100% by the target employees, to lease services to his firm. This case might be trickier since each S corporation is subject to annual filing fees. Lastly, Billy can implement a tiered LL structure, where all employees with vested investment interests form and own a separate LLC. The second LLC then offers services to the initial one. In each case, nevertheless, service members are subject to employee fringe benefits, which are uniquely different for each.
Suitability of the B corporation concept
B corporations balance purpose and profit. Ever since the first generation of B corporations were certified in 2007 - in just about 50 countries, attention has continually been drawn to the hybrid concept, with LLCs taking the lead from data by the Harvard Business Review (Kim et al., 2016). As much as the notion is super intuitive for go-getters, I would advise Billy to take reservations. The reason is that joining the ‘B corporation’ movement is, in a way, announcing that the company holds both shareholder and stakeholder interests. Ideally, this contravenes Billy’s simple business philosophy. Most frustrations would arise from the certification process, which is immensely rigorous and might upset the company’s organizational structure, policy, and financial transparency. Similarly, operating a B corporation requires paying for annual recertification, which is unnecessary for a firm that is not out to harness the associated publicity.
In summary, a limited liability company is the best choice for Billy Wildermon’s complex set of needs. As discussed, the LLC is favourable in terms of liability limitation, but it is also dynamic, allowing for convenient trade associations. It is also potent in terms of tax modules and in giving employee equity too. Lastly, I maintain that upgrading to a B corporation might fit partners and co-owners, yet grossly interfere with the serenity and sublimity with which his business philosophy seeks.
References
Bush, T. (2016). “PESTLE Analysis: Legal Factors Affecting Business.” PESTLE Analysis . https://pestleanalysis.com/legal-factors-affecting-business/
Cassady, V. (2017). “Nonprofit LLCs.” Business Law Today. https://businesslawtoday.org/2017/03/nonprofit-llcs/
Grigore, M. Z., & Gurau, M. (2017). Optimizing Tax Costs relating to a New Business. Global Economic Observer , 5 (1), 201.
Kim, S., Karlesky, M. J., Myers, C. G., & Schifeling, T. (2016). Why Companies Are Becoming B Corporations. Harvard Business Review , 17(9) .
Mancuso, A. (2017). Nolo's Quick LLC: All You Need to Know About Limited Liability Companies (Quick & Legal) . Nolo.
Martins, A. (March 5, 2020). “Which LLC Taxes Must Your Business File?” Business Daily .
Murray, J. (2019). “LLC Income Tax Options for LLC Owners.” The Balance . Retrieved https://www.thebalancesmb.com/llc-tax-options-398654
Sisney, L. (2018). The 5 Classic Mistakes in Organizational Structure: Or, how to Design Your Organization the Right Way. Organizational Physics . Retrieved https://organizationalphysics.com/2012/01/09/the-5-classic-mistakes-in-organizational-structure-or-how-to-design-your-organization-the-right-way/
Taft Law. (February, 2020). “ Employee Treatment of Owners in a Limited Liability Company .”
