To: Susan Stallings
From:
Date:
Subject: Business Recommendation for an Interstate Personal Water Craft Rental
The soundest legal advice available to any budding entrepreneur is to always work towards the best yet always be prepared for the worst. In the instant scenario of a personal water craft, the worst case scenario would be a tort liability claim that does not get covered by the available insurance. Singling out this element lies in the fact that the business Susan is venturing into is simple enough to be carried out as a sole proprietorship, partnership and as a limited liability company (LLC). The fact that she operates alone eliminates the partnership option leaving sole proprietorship and the LLC option. The liability issue will give the LLC advantage over the sole proprietorship, making it the ideal option (SBA, 2017) . A careful analysis of the dynamics of the available options, therefore, lead to the conclusion that Susan should register an LLC and use it to run the personal water craft aforesaid.
Advantages of an LLC
The LLC comes with numerous advantages, both legal and operational. For a start, the LLC has limited liability to some extent, and in some instances, absolute limitation of liability for the proprietor (SBA, 2017) . This means that the law considers Susan and her LLC to be two independent legal entities. Therefore, the personal liabilities of Susan cannot be visited upon the company and similarly, the official liabilities of the company cannot be visited upon Susan. For example, if a customer has a Kayak accident and the insurance does not cover the same, Susan’s house cannot be auctioned to cover the damages. This is crucial towards the aforementioned legal advice of anticipating the worst, even when planning for the best. The second major advantage of an LLC is the tax regime engendered therein. LLC’s are not levied taxes. Instead, it is the owners, or in the instant case the owner who gets to pay direct taxes for the profits made (SBA, 2017) . This makes tax filings and kindred paperwork very simple and also eliminates the complex taxes charged upon corporations. Finally, and most importantly for Susan, she does not need partners to open and manage an LLC as the law allows for her to be the sole registered owner of the LLC. If she, however, finds a partner along the way, there are means available to include this partner within the LLC and set the percentage of ownership the partner or partners will get. If the business grows large enough to outgrow an LLC, she can easily have it transformed into a corporation (SBA, 2017) .
Delegate your assignment to our experts and they will do the rest.
Disadvantages of an LLC
The LLC, however, also comes with several disadvantages. For a start, Susan is a member of the LLC and is, therefore, estopped by law to double as an employee (Sargent & Schwidetzky, 2014) . She cannot draw wages from the organization. Her entitlement is only limited to a share of the profits as and when they are made. This means that if Susan will also be running the company and it fails to make a profit, she will be working at no pay. The second disadvantage lies in hidden costs (Sargent & Schwidetzky, 2014) . Many states have a franchise or capital values tax on LLCs which can be steep. Further, the LLC will still need to pay renewal fees as well as pecuniary publication requirements. This fees will add to the necessary capital to start the company as well as running costs as they recur. Finally, investors only see a very thin line between an LLC and a sole proprietorship in the scenario like Susan’s where she happens to be the only member. The dynamics of the company will, therefore, also have the dynamics of the owner as an important bearing factor. This will make financing less available and more complex for the business.
References
Sargent, M., & Schwidetzky, W. D. (2014). Limited Liability Company Handbook, 2014-2015 Edition . New York: Thomson Reuters
SBA. (2017). Limited Liability Company (LLC) | The U.S. Small business administration. Retrieved July 22, 2017, from https://www.sba.gov/starting-business/choose-your-business-structure/limited-liability-company
