Sole Proprietorship: This type of business organization is owned by one person. This person is the manager and makes all decisions regarding day to day operations. Any money earned is considered income of the sole proprietor. Any debt incurred by the business also falls on the shoulders of the proprietor. Some advantages of a sole proprietorship are that the formation of this type of company fairly easy and you have control over any decisions that are made. The sole proprietor also does not have to share the profits. There are certain disadvantages that come along with this type of business organization.
One of the most important disadvantages are that you, the sole proprietor, are responsible for any liabilities. Other disadvantages are any endeavors that you embark upon become your financial responsibility and it becomes harder to hire, train, and keep exceptional employees. Liability: This is a disadvantage for this form of business. The sole proprietorship is an extension of its owner. The financial pitfalls of the company falls solely on the owner. If the case of any lawsuits filed against the business, any assets owned by the owner are subject to being seized by the courts.
Income Taxes: No taxes are levied directly on the earning of the sole proprietor. The earnings of the proprietor are taxed as personal income. Profit Retention: All profits are owned by the sole proprietor, minus personal taxes. Control: You are in control as the owner of a sole proprietorship. There is no one to answer to and the business is managed in any way you see fit. Longevity or Continuity of the Organization: The longevity of the business depends on its profitability. There is no eternal longevity of the sole proprietor. Death, retirement, or withdrawal from the business means that the company ceases to exist.
Convenience or Burden: You are your own boss. This can be rewarding and challenging, with long hours and high stress levels. Being your own boss can be very rewarding, but also very challenging. These owners may have to make decisions or perform tasks in which they have little or no expertise. General Partnership: A form of business in which all partners of the company has a right to manage the business. These partners also share unlimited liability for any judgments against the firm.
Advantages of a general partnership are the ability to have more than one financial resource, responsibilities are shared responsibilities, and forming this type of business is a fairly easy process. Disadvantages include unlimited liability and the potential for disagreements between partners. Liability: As a general partner, you are responsible for your mistakes, as well as those of your partners. All partners take a risk in that if the business’ assets are not sufficient to satisfy any debt or lawsuit, the assets of each partner are free game to any creditor or judgment. Income Taxes: Like a sole proprietorship, the earnings of a partnership are taxed only as the personal income of each partner.
Profit Retention: Usually in a general partnership, each partner shares in the profits unless otherwise stated in the partnership agreement. Control: Each partner has an equal right to participate in the management of the business. This could be an advantage because of the different expertise of the partners. It could also be a disadvantage because of one partner wanting to control an area where he is not as knowledgeable as other partners. Longevity or Continuity of the Organization: Each partner has the right to withdraw their partnership at any time. If a partner removes themselves from the company, they are still liable for any liability up to the time of their departure. Convenience or Burden:
There is a convenience of a general partnership because of shared 1 / 3 resources and the ability to pool resources. It could also become a burden because of disagreements between the partners that can harm morale and undermine the success of the business. Limited Partnership: In this partnership arrangement there is at least one general partner and one limited partner. Both partners are financial contributors to the company and share in its profits. There are other aspects in which these partners are different than those of a general partnership.
An advantage or disadvantage, depending on how you interpret it, is that a limited partner cannot actively participate in its management. An advantage for the limited partner is that they also only have limited liability. Liability: A limited partner is only liable to the extent of their investment. Income Taxes: A limited partner pays taxes on their share of the profits. Their income from the business is not considered earned income for the purpose of the self-income tax. Control: A limited partner has the least control of the operations of the business and the general partner has the most.
Location: Limited partners are required to file the proper paperwork with relevant state registration offices. Longevity or Continuity of the Organization: Limited partners are usually used for investment purposes such as investing in the development of real estate endeavors. Profit Retention: Profit for a limited partner is usually base on what they have contributed to the company. S-Corporations: A special form of corporation that allows the protection of limited liability but direct flow-through of profits and losses CITATION htt14 l 1033 (http://www. entrepreneur. com/, 2014).
You must first charter the business as a C-corporation in the state where the business is located. Some advantages of S-corporations are tax benefits, liability protection, and a perpetual existence. Disadvantages include higher tax service and legal costs, along with other standards of a C corporation. This can include filing articles of corporation, shareholder meetings, and even gives shareholders a chance to vote on major decisions. Income Taxes: Taxes are passed down to the shareholder of the corporation. Liability:
The owners are considered members and are not accountable for the company’s actions or any money the company owns. Longevity or Continuity of the Corporation: An S Corporation can have an unlimited lifespan. It is freely transferrable. Location: Must be register with your secretary of state. Convenience or Burden: S-corporations are expensive to set up and there is a lot of red tape. Many states also impose ongoing fees, such as annual report and/or franchise tax fees. Although these fees usually are not expensive, and can be deducted as a cost of doing business, they are expenses that a sole proprietor or general partnership will not incur CITATION www14 l 1033 (www. BizFilings. com, 2014).
Control: Major decisions must be made by shareholders or board of directors. The S corporation does not need to make adjustments to property basis or comply with complicated accounting rules when an ownership interest is transferred. C-Corporations: The most common type of corporation where ownership offers limited liability to all of its owners (stockholders). Some advantages are that stockholder are not liable for the debts of the company, ease of transfer of ownership, and the ability to raise large amount of capital.
Some disadvantages are the complexity of starting the corporation, complications of operating in more than one state, more paperwork and regulation, and double taxation of earnings. Income Taxes: The corporation is taxed on an income level and shareholders are taxed on any dividends. Longevity or Continuity of the Organization: Like an S-corporation they tend to have a longer life because of outside funding. 2 / 3 Profit Retention: All profits are kept by the corporation. Salaries are paid based on the work done by each individual in the company and dividends are paid according to the numbers of shares each shareholder owns.
Convenience or Burden: A person can dump their shares of stock at any time and the corporation will survive. The business and owners are not one in the same. The biggest burden is that you are double taxed. Location: As with the S-corporation, you must register with the secretary of state. Control: Decisions must be made by the shareholders or the board of directors. Limited Liability Company: This form of business blends element of a corporations and partnerships. They do not need to be organized for profit and many states are not sure how to regulate them. The owners of an LLC are called members. Advantages of an LLC are limited liability and simple and flexible management operational styles.
Some disadvantages are that they are more complex to form than a partnership, have a franchise tax, and many differences in each state’s laws. Income Taxes: The LLC is not taxed as a business. Instead are members are taxed as part of their personal income taxes. They can choose to be taxed as any business formation entity. This also varies by state with some having to pay an annual franchise tax. Liability: The members are not responsible for the company’s actions or money the company owes. Under the LLC rules, however, an individual isn’t responsible for the firm’s debt, provided he or she didn’t secure them personally, as with a second mortgage, a personal credit card or by putting personal assets on the line CITATION htt141 l 1033 (http://www. entrepreneur. com/, 2014).
Control: The business does not need a board of directors so one person can dictate how it runs. If there is more than one member, the rules of agreement will determine who has control over each aspect of the business. Profit Retention: The entity is not taxed and the earnings and debt are passed to those who own shares in the company. Location: Registered with the secretary of state. All states now allow some form of LLC business structure.
The owners of an LLC do not need to be United States citizens or have any permanent residency requirements, unlike corporations. Longevity or Continuity of the Organization: This is one of the most stable forms of business. An LLC can be passed down if a member decides to leave or dies. Of course, this situation is not always true. A lot of LLC’s tend to be services and sometimes are not profitable because of corporate companies that operate the same type of business in the References BIBLIOGRAPHY (2014, June 12). Retrieved from http://www. entrepreneur. com/: http://www. entrepreneur. com/encyclopedia/subchapter-s-corporation.
http://www. entrepreneur. com/. (2014, June 6). Retrieved from Limited Liability Company: http://www. entrepreneur. com/encyclopedia/limited-liability-company www. BizFilings. com. (2014, June 12). Retrieved from S Corporate Advantages and Disadvantages: http://www. bizfilings. com/learn/s-corporation-advantages-and-disadvantages. aspx TO: Wood Manufacturing Owner FROM: Michael Lilly DATE: June 12, 2014 SUBJECT: Suggested Corporation Structure It is my understanding that you are looking to change your business operation from a sole proprietorship to a different type of business organization POWERED BY TCPDF (WWW. TCPDF. ORG).