Corporation and Sole Proprietorship
- Pages: 4
- Word count: 775
- Category: Business Corporation
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Write a 350 to 700 word explanation of how each business structure might and might not be advantageous. Business structures: Sole Proprietorship, partnership, or corporation Sole proprietorship allows people with limited funds to run their own business. It’s inexpensive to get started. It also allows people to have absolute authority over all business decisions. A sole proprietorship has complete control and decision-making power over the business. Sale or transfer can take place at the discretion of the sole proprietorship. There are no corporate tax payments and there are few formal business requirements (“Advantages and Disadvantages of Sole Proprietorships”, (1999-2014)). Easiest legal structure to engage also the easiest to obtain a license for. A sole proprietorship may not be advantageous because the sole proprietor of the business can be held responsible for the debts as well as the obligations of the organization (“Advantages and Disadvantages of Sole Proprietorships”, (1999-2014)). There are two different types of partnerships, general partnership and a limited partnership. General partnership can be as simple as a written agreement between two people.
General partnerships require a very small amount of paperwork. Unlike corporations, partnerships can operate in many states without getting a new permit for each state the organization is run in. General partnerships abide by less regulations and are under less government supervision than corporations. Since individuals form partnerships, they are taxed like a sole proprietorship. Each partner has to include her business income on their personal tax return and they can deduct business losses on their individual return as well (“The Advantages of General Partnerships”, (2014)). General partnerships might not be advantageous because partnerships are limited to a small number of owners which makes it an impractical way to handle an organization with hundreds of owners (“The Advantages of General Partnerships”, (2014)). A limited partnership limits the personal liability of each partner to their capital investment. Limited partnerships are formed by two or more people, with at least one person acting as the general partner who has management authority and personal liability, and at least one person in the role of limited partner who is a passive investor with no management authority.
All partners, both general and limited, must enter into limited partnership by either oral or written agreement (“Limited Partnership”, (2012)). A disadvantage of limited partnerships is the legal responsibility. As a partner, he or she is legally responsible for the actions of each of your business partners. A limited partner’s liability for the partnership’s debt is limited to the amount of money or the property that individual partner contributed to the partnership. This is not true of the general partnership, where any money or property contributed becomes an asset for each partner (“Pros and Cons of Limited Partnerships”, (1999-2014)). Corporation is the most complex business structure. There are General Corporations, Subchapter S Corporations, and Limited Liability Corporations. A general corporation is the most common structure. In this case the company would be a separate legal entity and owned by stockholders. The company is allowed to have an unlimited number of stockholders and these stockholders are protected from business creditors.
An advantage is the company’s personal assets are protected from business debt or liability. The disadvantage of a general corporation is how expensive it is to form than proprietorships and partnerships (“Different Types of Corporations: Advantages/ Disadvantages of Corporations”, (1998-2011)). Subchapter S Corporation is a general corporation and has a special IRS tax status. This type of corporation is mostly used by small businesses. It provides a way to combine the tax advantages of a sole proprietorship or partnership with the limited liability and enduring life of a corporate structure.
The advantages of a S Corporation is the tax savings, business expense tax credits, and it allows these corporations to have an independent life separate from its shareholders this means if a shareholder leaves the company the business is not disrupted much. A disadvantage for Subchapter S Corporations would be less flexibility in allocating income and loss, and closer IRS scrutiny. A Limited Liability Company is not a corporation but it has many similar advantages to an S Corporation with added flexibility for managing the business and with fewer S Corporation ownership restrictions. LLC now-a-days is a preference because it is easy to obtain and there is a little bit of protection for the organization.
Advantages and Disadvantages of Sole
Proprietorships. ((1999-2014)). Retrieved from http://requirements http://experts.allbusiness.com/advantages-and-disadvantages-of-sole-proprietorships/875/#.VDxlbxawSSo Different Types of Corporations: Advantages/ Disadvantages of Corporations. ((1998-2011)). Retrieved from http://www.morebusiness.com/getting_started/incorporating/d934832501.brc The Advantages of General Partnerships. ((2014)). Retrieved from http://smallbusiness.chron.com/advantages-general-partnerships-4437.html Limited Partnership. ((2012)). Retrieved from http://www.business.ca.gov/StartaBusiness/DefiningaBusiness/LimitedPartnership.aspx Pros and Cons of Limited Partnerships. ((1999-2014)). Retrieved from http://www.allbusiness.com/business-planning-structures/business-structures/2514-1.html