There are seven forms of business: sole proprietorship, partnership, limited liability partnership, limited liability company (including the single member LLC), S Corporation, Franchise, and Corporation. 1. Research and provide three advantages and three disadvantages for each business form. 2. Provide a 100- to 200-word summary in which you provide an example business that you would start for each form. What is legally necessary to file in order to form that business? Discuss at least one of the advantages and one of the disadvantages of that form. Sole Proprietorship Advantages 1. Income taxes 2.
Continuity of business 3. Control of business Disadvantages 1. Liability 2. Closure of business 3. Difficulty raising capital Summary Sole priprietors are not that difficult to set up and maintain. For example, if someone were to start up a photography or salon business, then they are considered to be a sole proprietor. Being a sole proprietor means that you do not have to pay a supplier or default on any debts, but creditors may take the sole proprietors person possessions. Sole proprietors must report any and all business income or losses on their income tax return on the IRS form 1040 with a Schedule C attachment.
Most cities require that a sole proprietor register the business. Once they do this, the person will receive a business license or tax registration certificate. As a sole proprietor, control of business is important because that person does not have to follow the rules or regulations someone else has put out. They are able to charge prices they see fit and can set their own hours. Difficulty raising capital can be a burden for most sole proprietors who want to set up shop. It can cost a substantial amount of money to lease space and purchase equipment.
Without proper equipment, the business could have difficulty bringing in customers. Partnership Advantages 1. Easy to establish partnership 2. More creative brainstorming 3. More complimentary skills Disadvantages 1. Liable for other partners actions 2. Shared profits 3. Limited life on partnership Summary A partnership consists of two or more people owning a single business. Each partner contributes their share into the business covering areas such as labor and skill, property, and money. Take a restaurant for example. All decisions are made together including any issues, profits, or change of ownership.
A partnership can be easy, but expensive. All profits must be shared equally since the partners are equally invested in the success of the restaurant. Some forms that are required of a partnership are Schedule K-1 since they are not considered employees, but partners. For tax purposes, partners must fill out additional taxes such as income tax, self-employment tax, and estimated tax. A partnership needs to register with the IRS as well as state and local revenue agencies that will help with obtaining permits and tax ID numbers.
It is easy to establish and partnership since usually it is with someone that person trusts in all aspects, but the issues may arise causing a limited life on the partnership. Limited Liability Partnership Advantages 1. Flexibility 2. Liability protection 3. Tax advantages Disadvantages 1. Death of partner 2. Partners not consulting 3. Money and property becomes owned by partnership Summary A limited liability partnership consists of each partner having protection under personal liability. The LLP is not a separate entity for tax purposes, but profits and losses are reported on each partner’s tax return.
Because this is a partnership, each partner has equal rights in the management. What is great about a limited liability partnership is the flexibility. Flexibility allows the partner to have a certain type of control over the environment. Partners who do not consult each other can have issues in the future. This could lead to the closure of the company or a forming of a new partnership. To start a limited liability partnership, partners must register and submit it to the Secretary of State along with the required fees. A Limited Liability Partnership Alternative Security Provision transmittal form must be filed as well.
Once these documents are approved, the Secretary of State will return stamped copies of the forms as well as a Certificate of Registration to the partnership. Limited Liability Company, (including the single member LLC) Advantages 1. Freedom in management 2. Limitless ownership 3. Pass-through taxation Disadvantages 1. Taxation 2. Building capital 3. Government regulations Summary A limited liability company consists of a single owner, or sometimes more than one owner, and are not taxed as separate business entities. All profits and losses pass through the business to those who own the company.
Owners must report profits and losses on their personal tax return filing as a corporation, partnership, or sole proprietorship. If the LLC is ran by a single owner, they file a 1040 Schedule C form as a sole proprietor. Partners file a 1065 form consisting of a partnership, and a form 1120 is filed if the LLC is filing as a corporation. The LLC must be registered such as the State Corporation Commission, Department of Commerce and Consumer Affairs, Department of Consumer and Regulatory Affairs, or the Division of Corporations and Commercial Code. The great thing about an LLC is that the owner has freedom in management.
The owner is able to run the organization as they see fit not answering to anyone, but there are government regulations they must follow that can hinder some of that freedom. S Corporation Advantages 1. Protected assets 2. Straightforward transfer of ownership 3. Tax Credits Disadvantages 1. Restrictions on stock ownership 2. Tax qualification obligations 3. Closer IRS scrutiny Summary An S Corporation is an eligible domestic corporation that is able to avoid double taxation. Usually the corporation and shareholders are both taxed under a corporation, so S corporation avoids the extra taxation.
The organization is not considered an S corp until it is qualified under IRS stipulations. The business is not taxed itself, but shareholders are taxed. The S Corp must register with the IRS, state, and local revenue agencies that provide permits and tax ID numbers. Depending on the state, all S corps are not taxed equally. To file as an S Corp, you must file as a corporation and have shareholders file a 2553 form to see if the corporation qualifies. In an S Corp, tax credits are a valuable advantage because only the wages of an employee who is a shareholder go into employment tax.
The disadvantage of S Corp is that the IRS keeps close tabs on all tax filings. Franchise Advantages 1. Increases chances of business success 2. Provides establishes products from widespread brand name recognition 3. Provides franchisee independence to operate their own business Disadvantages 1. Franchisee must comply with franchisor on procedures and restrictions 2. Franchisee must pay advertising fees and ongoing royalties 3. Limited franchise agreement Summary Someone who owns a franchise is willing to take on a business, but under the franchisers rules and regulations.
The franchiser provides the type of services, site selection, training, products, and marketing plans that will allow the franchisee to run the location under this guidance. Franchisees provide the start up costs as well as the money for day-to-day operations. Types of forms that are used in franchises include a UFOC, franchise agreement, owners agreement, development agreement, and subfranchise agreement. What is great about owning a franchise is that the business owner increases their chance of becoming successful. Some franchises do well, while others perform not so well which could limit the owner’s franchise agreement.
Corporation Advantages 1. Stock markets can help raise capital 2. Transfer of ownership to person with highest share certificates 3. Owners’ contribution, regarding liability, is at stake rather than personal assets Disadvantages 1. Requires central regulatory authority and listing on stock exchange 2. Board of directors 3. Double taxation Summary A corporation consists of many tasks for start up. The business needs to comply with state corporation rules. Directors need to be appointed as well as the many forms filled out. Some of these forms include articles of incorporation along with filing fees that are required.
By laws need to be completed as well as issuing stock certificates to the shareholders. After this, obtaining licences and permits for the business is prudent. This includes filling out form 2553 to obtain Tax ID numbers from the IRS. A permit from the state is required depending on the state. The advantage corporations have is that the shareholder with the most share certificates becomes the next owner if someone were to step down or pass away. A disadvantage is the double taxation. Taxation not only includes the business, but the shareholders as well.