A business with one owner who is responsible for all features of the business. Everything that happens in the company from the daily operation to the legal obligations are controlled by one individual. Sole Proprietorship Advantages: •Convenience - Usually the least costly to begin. Sole proprietorships are easy to start up. They entail acquiring the proper licenses and permits.
Regulations very from industry, state, and county. There is no administrative configuration. •Control- Owners are permitted to organize the company in the way they prefer. All choices about how the business will operate are made by the owner. The owner has the choice of hiring someone to run the company or doing it themselves. •Profit Retention- Revenues from the establishment can be reinvested or distributed straight to the establishment’s proprietor.
•Income Taxes – There are no business taxes and profits or losses are filed with the proprietor’s personal tax return. •Location - Moving the business or expanding it into another state is relatively easy. Usually requiring registering the DBA in the new state. Since every state either has a different income tax or no taxes the sole proprietor needs to be aware of any change in state taxes. Budgeting for taxes can have a major impact on the financial aspect of the business. •Dissolution- Dissolving the business is a simple matter of paying off any outstanding debts and not taking on any new business Sole Proprietorship Disadvantages:
•Liability – There is no protection of personal assets. If the company is sued the personal assets of the owner are at risk as well as the assets from the business. •Financial - It is also harder to get business financing for expansion and growth. Usually limited to personal savings or consumer loans. •Longevity – If the owner is unable to work for any length of time the business is more likely to fail. •Burden - All administration of the establishment is the responsibility of the proprietor. General Partnership
A company formed by two or more individuals who agree to share and be responsible for all aspects of the business. Like a sole proprietorship it’s an unincorporated entity. The Advantages of a partnership:
•Convenience - Collaboration as a product of combining partners' distinctive areas of knowledge.
Financing is done by the partners in the characteristics of a loan which generates interest income and a business deduction. •Income taxes- An informational tax return must be filed which shows the amount of income or loss to each partner. •Liability- Liability may be distributed between the partners. •Control - each partner has a defined role in the business. Regardless of the amount of assets brought into the business each partner shares equally in the decision making process. All partners are responsible for the other partners, including financially, and are expected to act in the best interest of the partnership •Taxes – Partnerships do not having to pay both a personal and a business tax.
The business must file a tax return for information purposes only. The profit or loss from the business is divided between the partners to be reported on their individual tax returns. Also, each of the partners are accountable for paying self-employment tax. •Location- Moving or expanding a partnership is simple it requires filing a new DBA with the new state. Taxes should also be taken into consideration when moving a partnership to a new state since it will have a direct impact on the financial aspect of the business •Longevity or continuity of the organization – Dissolving a partnership can be done at any time •Profit retention - Incomes from the partnership go straight to the owners. Partnership Disadvantages:
•Liability – Unlimited liability puts personal assets at risk. Each partner is at accountable for the business obligations acquired by the other partners. •Longevity or continuity of the organization - limited to a small number of owners. Unless stated in a partnership agreement a partnership must be dissolved in the event of death or withdrawal of a partner. In some states the partnership can continue if it is provided for in the partnership agreement. An example would be the other partners buying out the share of the partner leaving. The reason for this is to protect creditors, and maintain liability for the debts of the establishment •Control – Issues with partners may arise as the resulting from misunderstandings or different goals, putting an end to the partnership.
•Burden- Formation and subsequent changes in structure are complex. Limited to a small number of owners. Each partner is legally responsible for the actions of each partner. Unless you can prove in a court of law that you did not participate, knowingly or unknowingly, in illegal activities you could be forced to pay fines, penalties or even serve jail time. Limited partnership
Like a partnership a limited partnership has two or more owners. Unlike a general partnership a partnership agreement is required. The partnership agreement stipulates which partner has what responsibility and which ones have what authority. Advantages
•Liability - Limited partnerships have both general and limited partners. A limited partner has little accountability for the debts incurred by the partnership. At most the limited partner can only lose the amount they have invested, and cannot run the business •Income taxes - Partnerships do not having to pay both a personal and a business tax. The business must file a tax return for information purposes only.
The profit or loss from the business is divided between the partners to be reported on their individual tax returns. Also, each of the partners are accountable for paying self-employment tax. •Control – It is required to have no less than one general partner. All day to operations are the responsibility of the general partner, who is also responsible for making legally binding business decisions. Like a general partnership, general partners in a limited partnership are unlimited in the amount of personal liability they have for the debts of the business.
•Profit retention – Revenues earned by the business go directly to the partners.
•Location -Moving or expanding a partnership is simple it requires filing a new DBA with the new state. Taxes should also be taken into consideration when moving a partnership to a new state since it will have a direct impact on the financial aspect of the business •Convenience - The ability to trade company stock publicly and gain investors. When the company’s profit rises each partner and investor can receive higher returns on the stock. . There are no laws governing the structure of the partnership and the partners can run the business in whatever manner they choose. Disadvantages
•Income taxes – States that do not acknowledge a limited partnership for tax purposes treat this type of business structure as a non-partnership. •Longevity or continuity of the organization – The partnership agreement and certificate, needs to specify the wishes of the partner for continuation of the business upon death or withdrawal from the partnership. In most states the law specifies that a limited partner may allocate their share in the company to another person without influencing the closure of the partnership.
On the other hand, the departure of a general partner establishes the specific justifications for the termination of a limited partnership, with the exception of: oIf there is another general partner and the stipulations of the partnership agreement sanction the continuance of the business oBy the end of the third month of the partner's withdrawal, the enduring partners approve in written form to continue the business and to designate a new general partner. • Burden - specific facts about the partnership and the associates must be recorded with the proper state agencies. Having to get permission from other partners for major business decisions. C-Corporations
A C-Corporation is legally viewed as an individual entity A C-Corporation must meet two requirements. First the business must be recognized as a legal corporation in the state it was started in. Second, it cannot be taxed under any provision of the IRC other than subchapter C. Subchapter C of the IRS treats a C corporation as a separate entity from its taxpayers and shareholders. It is required to file a separate tax return with all income and deductions. A distinctive characteristic of the C-Corporation is it is subjected to double taxation. First it is taxed on its earnings and then the shareholders are taxed a second time on their separate personal income tax returns when they receive dividends. Advantages
•Liability - Limited Liability, in other words, stockholders are only accountable to the amount of their investment. Unlike a partnership or Sole proprietorship their individual resources are not at risk. Any debts The company acquires are considered the company’s responsibility. Shareholders are protected by limited liability also known as the corporate veil. •Income taxes
- . Unlike an S corporation, C-Corporations can subtract fringe benefits, such as, group term, life, health and disability insurances, payments up to $5,000 from death benefits, and employee medical expenses not paid by insurance, from their taxes as a business loss. Along that line employees that are shareholders are exempt from having to pay taxes on the fringe benefits they receive. A high percentage of the employees have to be able to have access to the benefits before the tax break applies. •Longevity or continuity of the organization - Transferring stock ownership or loss of a proprietor does not change the company.
Since the corporation is considered a separate entity it continues to exist until it is dissolved. •Convenience - The raising of capital. Because a corporation has to sell stock, it is often simpler for a company to raise investment than for either a sole proprietorship or a partnership. Investors are lured in by the probability of dividends when the corporation makes a profit. Although a new corporation, from a banker’s perspective, is more risky than an individual with a home and other assets. Corporations also find it easier to attract better employees, due to being able to offer stock option and other fringe benefits. Disadvantages
•Income taxes - double taxation. After all of the expense are deducted the C-Corporation pays taxes on the revenues at the corporate level. If any of the proceeds are dispersed as bonuses to the investors, they in turn pay taxes on it on their personal tax returns. If the company expects to reinvest most or all of the profit back into the business this may not be considered a disadvantage. In an attempt to avoid the double taxation, some companies pay their shareholder-employees at higher salaries.
However, the IRS watches for this and will often audit companies, stating that the administrator salaries are unreasonable. In order to avoid this a company should take into consideration the experience or special abilities of the employee. The duties that are expected, ad how much other corporations are paying for the same or similar positions.
The J.K. Lasser Institute counsels to keep salaries steady. If salaries fluctuate according to the earnings each year it will grab the attention of the IRS and result in an audit and possible a charge of unreasonable salaries and the pay will be considered dividend payments Longevity or continuity of the organization -
•Control - With small businesses the owners usually take on all aspects of the business, but in a corporation the responsibilities are divided by strict rules. oShareholders – are owners of the company stock and they elect directors, they modify the bylaws and articles of incorporation. They also sanction major actions the company wants to incorporate such as mergers or the sale of company assets. Only shareholders may dissolve the corporation. oDirectors – Manage the corporation, issue stock, elect officers and make major decisions. oOfficers, Corporations must have a president, secretary, and treasurer. It is the responsibility of these officers for making the necessary day to day decisions that regulate the corporation. oEmployees
– Receive an hourly wage or salary in exchange for the work they do for the corporation. •Profit retention - The rules governing the distribution of dividends is another disadvantage. The basis of stockholdings is how a corporations profits are distributed, unlike a partnership that can base the division of profits on investment or employment. So a stockholder can only earn an amount equal to the percentage of stock they own.
In some states, the amount of how much profit can be distributed is limited. All prior expenses must be paid before a company can declare dividends. If the corporation fails to do this most states will hold the directors responsible and personally liable to creditors. •Location – To move to another state one of three things must be done: oContinue Operating in the initial state and register as a foreign company in the new. oSuspend the business in the initial state and form a new one oRestructure and merge the initial business into a new business in the new state.
•Burden -the State and Federal statutes governing Corporations. In order to follow the law it is crucial to engage lawyers and accountants. Regular meetings for investors and the board of directors are required and meticulous records of those meetings must be taken and kept. Since engagements chosen by a corporation must be sanctioned by its executives, it can slow the business’s proficiency to take swiftly act on urgent matters. If a C corporation needs to go to court they must be represented by a lawyer whereas a sole proprietor or partnership can represent themselves. If the corporation does business out of state it is subjected to the taxes in the other states. S-Corporations
An S-Corporation is a corporation that is treated as a pass through entity for tax purposes. This election is made through the IRS. An S-Corporation is created by filing Articles of Incorporation with the Secretary of State. It issues stock and is governed as a corporation. Limited liability apples to an S-Corporation, individual properties cannot be appropriated to fulfill business debts. Double taxation does not apply with an S-corporation, like partnerships and sole proprietorships, income and losses are passed to the shareholder.
Advantages to an S-Corporation
•Liability - an S-Corporation shields the resources of its stockholders. •Income Taxes - An S-Corporation does not pay taxes at a corporate level. Most states follow the federal rules. Business loss or gain is passed through to the stockholders to report it on their personal tax returns. Tax-favorable characterization of income- S-corporation stockholders can be employed by the business and also receive dividends and other allocations that are tax-free to the amount of their investment. Reasonable classification of allocations as salary or dividends can help decrease self-employment tax and still generate business loss and wages paid deductions for the corporation. •Longevity or continuity of the organization
- The structure of the S-Corporation allows transfer of ownership and termination of the business. oInterests in an S-Corporation can be transferred with no unfavorable tax penalties. Ownership of interest does not require modifications to the property basis or the need to submit to complex accounting rules, unlike an LLC or a partnership.
•Convenience - Heightened Credibility- Ascertaining credibility with prospective customers, employees, vendors and partners is easier with an S-Corporation. It offers a perception of formal commitment to the business. •Location - To move to another state one of three things must be done: oContinue Operating in the initial state and register as a foreign company in the new. oSuspend the business in the initial state and form a new one oRestructure and merge the initial business into a new business in the new state. •
Disadvantages to an S-Corporation. There are some potential disadvantages to forming an S-Corporation, including:
•Burden - An S-corporation must first file Articles of Incorporation with the state. They must acquire a registered representative for the company and pay all applicable fees. Some states levy continuing fees, including annual report and/or franchise tax fees. oStock ownership restrictions- There is only one class of stock. However, it can have voting and non-voting shares. Limited number of investors, no foreign ownership is allowed, and certain types of trusts and other entities are not allowed. oLess flexible in distributing income and loss
- Due to having one class of stock. It is harder for an S-Corporation to distribute deficits or profits to specific shareholders. Distribution of profits and deficits is regulated by stock ownership. •Income taxes - Any mistakes in various aspects including election, consent, notification, and stock ownership and filing requirements can result in dissolution of the S-Corporation status. With quantities dispersed to a stock holder being dividends or salary, the IRS closely watches payments to insure that the representation corresponds to actuality, possibly resulting in wages being considered as dividends, in turn costing the company a tax deduction of compensation paid. Also dividends may be redirected as wages subjecting the corporation to an employment tax liability.
•Control - The arrangement of an S-Corporation comprises three parties: directors, officers, and shareholders. oWhile and S-Corporation is maintained by investors, they don’t ordinarily operate the establishment. However they do sway company options by selecting and eliminating directors, endorsing or rejecting revisions to the Articles of Incorporation and voting on key corporate matters oThe directors, are the ones who are accountable for administering the activities of the S corporation. They customarily make only the foremost business rulings, and assign and manage officers, who make the everyday business choices. oDay to day Management of the company is the responsibility of the officers. oOne stockholder, who acts as the director and officer, is allowed in most states. Limited Liability Company (LLC)
The LLC melds the tax advantages of a partnership with the limited liability of a corporation. Once established the LLC obtains the status of an independent legal entity competent of commencing the same types of business procedures as a corporation or partnership. Advantages