A sole proprietorship is a form of business that is owned by a single individual. • Liability – Due to the lack of legal distinction between the owner and the business, the owner is fully responsible and liable for all debts that the business incurs in the same manner that an individual is fully responsible and liable for all debts that they incur. There is no legal distinction between the assets of the owner of the sole proprietorship and the business; this means that creditors have the ability to come after the owner’s business and personal material assets. Income Taxes – Since the business is the same as the owner of the sole proprietorship, all profits or losses from the business are filed by the owner on their personal income taxes. All of the profits from the sole proprietorship will be taxed, except for deductions in the form of business expenses. Longevity / Continuity – There is no continuity of the business if the owner dies; the business simply ceases to exist.
Control – A major advantage of using the sole proprietorship form of business is the fact that the owner of the business has full control of the business. Profit Retention – The owner of the Sole proprietorship retains all of the profits from the business. Unlike a corporation that is taxed twice, the owner of the sole proprietorship is taxed only at the individual tax rate. Due to this, the owner of the sole proprietorship is able to retain more of the profits. Location – If the owner of the sole proprietorship decides to move to another state, they simply need to register a new DBA (Doing Business As) in that state. Convenience / Burden – Sole proprietorships are not governed by the same regulations that corporations are faced with (i.e. annual meetings, state fees, annual reports, etc.) Sole proprietorships are an easy, inexpensive, and convenient way of doing business.
... the owner would be financially responsible for the remaining amount. Income taxes can be an issue in a sole proprietorship where the business produces higher profits. ... owner even if they were in the businesses name. Sole proprietorships are also the most convenient companies to own. Sole proprietorships are not required to produce profit ...
A general partnership is an agreement between two or more individuals to essentially go into business together. • Liability – Liability in a general partnership is similar to liability in a sole proprietorship; the partners share unlimited legal and financial responsibility for the business and all debts that are incurred by the business. This would be considered by most to be the main disadvantage of a general partnership. • Income Taxes – The partners in a general partnership pay only a single personal income tax on the profits from the business. Unlike a corporation, the general partnership does not have the same federal double taxation burden. The partners can write off much of the costs to run the business as expenses, and also have the ability to write off any losses. This is typically the main advantage of having a general partnership.
Longevity / Continuity – There can be devastating effects on the partnership if one of the partners dies. If an ownership transfer plan has not been created, the death can be the end of the partnership and the business. Control – In a general partnership, the partners retain full and equal control over the business. This can be a disadvantage if the partners are unable to agree upon certain aspects of the business. Profit Retention – The partners in the general partnership retain equal parts of all of the profits from the business. Location – If the partners plan to move or expand into another state, similar to the sole proprietorship, they simply need to file a new DBA in that state. Convenience / Burden – Also similar to the sole proprietorship, general partnerships do not follow the same reporting requirements that corporations are faced with (i.e. annual meetings, state fees, annual reports, etc.) An oral or written contract can be created to protect each partner in the general partnership, but is not a regulatory requirement.
... to liabilities general partners including industrial partners, are liable for partnership net contractual liabilities up to the extent of their personal assets. Limited partners are liable ... If it is a corporation or partnership it must be registered with Securities and Exchange Commission (SEC). The business should also be registered ...
A limited partnership functions in a similar fashion a general partnership. The only major difference is that there are additional limited partners. • Liability – As the name implies, the additional limited partners are only liable in the amount that they have invested into the business. This protects the limited partners from the full liability that is shared by the general partners. Income Taxes – The limited partner’s profits are considered personal income and taxed as such. All profits from the limited partnership are considered personal income and taxed at their personal tax rates. Longevity / Continuity – The continuity of the business is not affected by the death or disassociation of a limited partner. An advantage for a limited partner is that the limited partner’s investment takes priority in the general partnership dissolves due to a death or disassociation of one of the general partners.
3 • Control – A major disadvantage of the limited partnership becomes obvious when discussing the actual management of the general partnership. Limited partners have no control of the day-to-day operations of the general partnership. Profit Retention – The limited partner receives an agreed portion of the profits that typically reflects the percentage of the amount that has been invested into the general partnership. Location – If the general partners expand or move into another state, the burden of regulatory requirements is solely on the general partners and not the limited partners. If the partners plan to move or expand into another state, they simply need to file a new DBA in that state. Convenience / Burden – A limited partnership is more difficult to form compared to a general partnership. Unlike a general partnership, a limited partnership must generate annual reports and file for a certificate with the state.
C – Corporation
A C Corporation is the most common form of business for a large company. • • Liability – C Corporations have limited liability protection so that the shareholders are not personally liable for the debt of the corporation. Income Taxes – C corporations file a corporate tax return and are taxed separately as a corporation from their shareholders. The C Corporation faces double taxation since the shareholders also have to pay personal income taxes on dividend income obtained from the corporations stocks. Longevity / Continuity – Once the corporation has been created it can essentially exist forever. Since the owners are shareholders who can sell their stocks to a new shareholder, the death of an owner / shareholder would not dissolve the corporation.
1. SOLE TRADER Single person owns the business Because of their size, generally most of them work on their own however they can also employ people. It is easy to set up as there is no legal documents required They all have 'unlimited liability' which means that they have to sell their own possessions in order to meet business debts if the business goes bankrupt. Entitlement to all the profits They ...
Control – Shareholders are essentially in control of the entire corporation. The shareholders elect directors who are responsible for most of the decision making at the corporation. Shareholders also elect officers who are responsible for the day-to-day operations of the corporation. Profit Retention – Profit retention is a bit of a disadvantage for a C Corporation due to double taxation of the corporation’s profits. As mentioned above, the corporation and the shareholders have to pay taxes on all profits earned. Location – Relocating the C Corporation to a new state mainly requires additional tax related paperwork. The C Corporation can expand to another state by filing as a foreign entity, or registering as a new corporation in the state and then dissolving the corporation in the old state.
4 • Convenience / Burden – C Corporations are required to hold shareholder meeting, file annual reports, pay annual fees, and issue stock.
S – Corporation
An S Corporation has many more restrictions than a C Corporation, but is able to avoid double taxation. • • Liability – Similar to a C Corporation, S Corporations have limited liability protection so that shareholders are not fully liable for the corporations debts. Income Taxes – Since S Corporations are considered pass-through tax entities, they do not have to pay corporate income taxes. Since they are taxed in a similar fashion as to a partnership, they are able to avoid double taxation. Longevity / Continuity – Similar to the C Corporation, once an S Corporation is created it can exist forever. The death or disassociation of a shareholder will not dissolve the S Corporation. Control – Also similar to the C Corporation, the board of directors that control the corporation are made up of shareholders. Profit Retention – An S Corporation is more like a partnership with 100 or less partners.
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All of the profits and losses are passed from the corporation to the shareholders. This is the reason why an S Corporation is classified as a pass-through tax entity. Location – The S Corporation can be moved or expanded into a new state the same way that you would move a C Corporation. The S Corporation can be registered as a new corporation and then dissolved in the old state, or the S Corporation can be registered as a foreign entity in the new state. Convenience / Burden – S Corporations are burdened with a ton of regulatory requirements that they must follow. They are also only allowed a maximum of 100 shareholders and can only issue a single type of stock.
Limited Liability Company (LLC)
A Limited Liability Company (LLC) shares many similarities with an S Corporation, but is not burdened by the same amount of regulatory requirements. • • Liability – Similar to the limited partnership, the personal assets of the members of the LLC are not at risk. Members can only lose the amount that they have invested into the LLC. Income Taxes – Like the S Corporation, the LLC is not taxed as a corporation. The taxes are passed on to the members of the LLC and are taxed as personal income.
5 • Longevity / Continuity – Unlike the S Corporation, a LLC does not always exist forever after it has been created. LLC’s can be dissolved by a death or a disassociation of a member. Some states actually require a disillusion date when filling out the documents to create the LLC. Control – LLC’s can have a board of directors made up of members, or managers to manage the LLC. Profit Retention – Similar to an S Corporation, all of the LLC’s profit losses and gains are passed onto the members. Location – When moving or expanding into another state, a LLC can register as a foreign entity, or can be registered as a new LLC with a new tax ID number and then dissolved in the old state. Convenience / Burden – LLC’s do not have the same amount of regulatory requirements that burden S Corporations. They also are not restricted to the amount of members that the can have invested into the LLC.
TO: John Smith / Owner of Wood Working Manufacturing FROM: Richard Brodhagen RE: Form of Business Recommendation DATE: May 25, 2012 After analyzing the current form of business that is currently in use at Wood Working Manufacturing, I am recommending that you change your form of business from a sole proprietorship to a Limited Liability Company (LLC).
E-Corporation and their Business Model Selling businesses, products or services has become much more complex through the Internet. As Hugh Patis sion mentioned, The E-Corporation - Competition today is not between products, it's between business models. This explains the complexity of the whole marketing of a product or service via net. Which way is more efficient, cheaper, updated, or which model ...
Changing to a LLC would benefit your company in many ways, especially when it comes to your concerns regarding personal liability protection and continuity of the business. A LLC would also alleviate many of your tax related concerns.
Under your current form of business you are fully liable for all debts that are incurred by your company. If your business were to fail for any reason you would have no personal asset protection from creditors. If you were to change your business to a LLC your personal assets would no longer be at risk, you would only be liable for the capital that you have invested into the company. This is a major advantage over the current sole proprietorship that you own. Your plan to expand into another state will be difficult under your current form of business. If you were to incorporate or create a partnership to gain capital assets, you may be risking personal assets in the lack of liability protection involved in a partnership, or losing profits due to the double taxation that comes with incorporation.
An S Corporation would protect you from both of the issues above, but would also limit your company with regulatory requirements. A LLC would be advantageous in gaining the required capital, reducing personal liability, and preventing double taxation when expanding into a new location. If family members serve as officers and members of the LLC you will be able to retain much of the control over the manufacturing company. This will also assure that the company will not be dissolved and will continue to operate if you were to die or disassociate fro