The first step in starting any business is choosing the right structure. Often, business owners will consult with a lawyer before they start a company to make sure that all of their forms are in order. Business owners can choose from common business structures like sole proprietorships, C corporations, partnerships, limited liability companies (LLC) and S corporations.
Limited Liability Companies
An LLC is considered an entirely separate entity from the business owner. This means that the corporation is responsible for the debts and keeps the profits. If the business fails, the owner is not liable for the losses. It is taxed like a sole proprietorship if there is one owner. When there are multiple owners, an LLC is taxed like a partnership.
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Complexity: General taxes, partnership tax rules and other regulations make an LLC exceptionally complex when it comes to accounting.
Unattractive to Investors: Venture capitalists generally do not invest in these companies because they are pass-through entities.
Sole Proprietorships
A sole proprietorship is when the owner is personally liable for any debts or lawsuits incurred by the business. States do not require a separate business form or taxes to be filed by the sole proprietorship. Instead, the owner reports all of the company's profits and losses on their own tax return. While a sole proprietorship is easier to create and operate, it does leave the business owner liable for any lawsuits or costs incurred by the company.
Benefits:
Inexpensive: Organizational documents, filing fees and legal fees are not required.
Avoid Double Taxation: Unlike a C corporation, the owner and the business pay taxes together. This means that the owner is not taxed twice on some of the company's income.
Simplicity: Owners do not have to file any documentation other than possibly registering the company's name.
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Unlike a C corporation, an S corporation can only have a limited number of shareholders. These shareholders must all by United States residents or citizens by law. Like a C corporation, an S corporation must record meeting minutes and host annual meetings. At the end of the fiscal year, the owner reports all of the profits and losses from the company on their personal tax return. One of the benefits of using an S corporation is that it allows you to separate your personal finances from business debts.
Benefits:
Pass-Through Treatment: Profits and losses from an S corporation flow directly to the shareholders. If the business is enjoying significant profits, this is ideal for individual shareholders.
Simple Conversion: As the business grows, owners may want to convert it to a C corporation to gain venture capital. With an S corporation, it is relatively easy to change to a C corporation.
Protects Against Personal Liability: Like a C corporation, an S corporation provides investors and owners protection against the company's debts and liabilities.
LLCs must typically pay more fees to file as LLCs compared to some other business entities or sole proprietorships. Additionally, many states require yearly renewal fees. However, these fees are usually less than what some other corporations have to pay. Because of the protections afforded to LLCs, some types of businesses are ineligible to file as LLCs. Banks, insurance companies, and medical service companies are examples of businesses that can not be a LLC. Another big disadvantage is taxes. Although LLC’s allow owners to avoid federal taxes, you may actually end up paying more than it would with a different corporation, depending upon the nature of the business. Working with an accountant and/or tax lawyer is a really good idea when planning your business and forming your LLC but can also be quite expensive. The LLC business form is a relatively new concept. As a result, not a lot of cases have been decided surrounding LLCs. Case law is important because of predictability. If you know a court has ruled a certain way, you can act in a specific way to protect yourself. But if not many laws have been established yet, there is a certain vulnerability with your corporations that could expose you to greater
Corporation – “A business organization that exists as a legal entity and provides limited liability to its owners.” (Longenecker, Petty, Palich, Hoy, Pg. 205) The main advantage of a corporation is that the business liability falls onto this entity instead of the individuals that own it. The disadvantages of this organization are found mostly in its formation. A corporation is expensive to create and requires compliance with state
A sole proprietor is an individual carrying on business alone without having registered a single member company. Unlike companies, there are fewer controls on the setting up of sole proprietorships and they usually governed by the general law of contract. A sole proprietor unlike other business forms, can use business funds in any manner due to their high level of autonomy. It is an adequate structure for a single person with capital but not for large-scale investment.
There are many different types of business structures, but if you own and operate a business that it is a sole
Owners take financial part of the corporation by having stocks and bond, and they expect financial return for that. All these owners can be differing from one another and each one of them can have different preferences such as money, morality, obligations, loyalty. Supplies ...
The sole proprietorship has one owner that is completely liable for the actions of the company but has total control over all decisions. The profit or loss of the business is reported and taxed on the owner’s individual tax return.
1.LIABILITY: There are no limits on liability with a sole proprietorship, the owner is responsible for all the businesses debts and obligations. The earning power of a sole proprietor can be limited due to lack of capital. The sole proprietor is only able to obtain personal credit to expand the company, the bank will not treat the company as its own entity
5). Even though there are two owners of the McGee Cake Company it is still similar to a sole proprietorship. A LLC will allow the same aspect of ownership and also the protection that a corporation has. The protection that a LLC will offer is legal protection for any legal actions brought against the organization rather than the legal action being placed solely on the owners. Also a LLC does not have to disclose financial records to the United States Securities and Exchange Commission
A limited liability company exist on there own right this means that the companies finances are distinct from the personal finance of there owners so if the company falls in to debt the company will be liable not the owners.
Corporations can be classified as follow: Public Corporation is established to administer public business that will benefit the general public. These types of corporations are created and owned by the government and the shares are publicly treated. Private Corporation is formed by private individuals primarily for private purposes and not public ones. (Charitable and religious, banking and manufacturing corporations.) Profit Corporation is formed with the primary goal to make profit.
An additional advantage is that a sole proprietorship can be easily organized. It’s easy to start your own business. First of all, it costs very little money to start your own business. As a sole proprietor, you have minimal legal requirements. The owner doesn’t have to establish a separate legal entity.
Sole proprietors because they are the owners, do not have to pay business taxes, however, the owner must pay taxes on the income that is collected from the business as a part of his or her own personal income taxes. Despite the fact that the business is owned and run by the sole proprietor, there is a definitive need to comply with any licensing requirements in the particular state where the owner is doing business. This includes zoning ordinances, local regulations as well as the necessary paperwork attributed to the business running smoothly. There is a nominal amount of paperwork associated with the sole proprietorship in comparison to the other types of business entities, which makes it an even more attractive business to operate ("Advantages and Disadvantages of Sole Proprietorships").
Section 4 of the Registration of Businesses Act 1956 defines a sole proprietorship as a business established, owned, funded by both the financial and management run by one individual. It usually involves a small-scale business. These types of businesses often owned by one person, where all business depends on it. The sole responsibility of the owner is unlimited. If the business failed and was declared bankrupt, creditors can sue the owner of the claimed debt. Tho...
Many business owners decide that the initial ownership is either a sole partnership or if ...
This form is extensive and requires a tremendous amount of involvement of all members. The advantages of this business form is all liability is retained by the corporation, however, if the bank is requiring specific personal guarantees by the brothers, either they agree or offer assets as collateral to alleviate no other liability other than the assets pledged. This form allows the business to be a separate unit from the owners and shareholders. Shareholders own the business and are limited in their liability solely for the amount invested into the company. This means the owners are not managing the business, meaning shareholders elect a board of directors to manage the business. The business and shareholders are taxed on the profits and dividends respectively. This indicates the business is double taxed and is much higher in this form than in all of the other forms. However, the Subchapter S Corporation provides for the same flow through benefits of the LLC. The significant difference is the corporation is established by the Federal Government instead of at the ...