Business Structure Case

Business Structures

Naveen Thummala

FIN/571

June 23, 2015

TED HAAS

Business Structures

One of the first steps before starting business should be choosing the proper business structure of the company as each type of business structure will have its own legal and tax implications. The types of business structures include sole proprietorship, partnership and corporation.  

Sole Proprietorship

A sole proprietorship is the most common type of business in United States. This type of business typically consisting of the proprietor and a handful of employees. In Sole Proprietorship business type, the owner of the business is entitled to all profits and handles all your business’s debts, losses and liabilities. The advantages of Sole Proprietorship include complete control of the business, Ease and inexpensive to forming the business and easy tax preparation as Sole Proprietorship is not taxed separately. Disadvantages for this type of business include unlimited personal liability, hard to raise capital and heavy burden as you handle success or failure of the company.

Partnership

A partnership consists of two or more owners who have joined legally to manage a business. Partners of the business contribute to all aspects of the business, including decision making and raising money for the business. To form a partnership business, all owners enter into an agreement with all the roles and responsibilities of each owner. They also agree on how profits are shared and how ownership will be transferred in case of specified events, such as the retirement or death of a partner.  There are two types of partnerships general partnership and limited partnership.

General partnership is very similar to sole proprietorship with same basic advantages and disadvantages. A key disadvantage of a general partnership is that all partners have unlimited liabilities for the partnership`s debt. A second type of partnership is a limited partnership where partners have limited liability. To qualify for the limited partner status, a partner cannot be actively engaged in managing the business.

The advantages of partnership business include shares financial commitments, shared responsibilities, easy and inexpensive to form. Disadvantages include, the disagreement between partners, shared profit, joint and individual liabilities.

Corporation

A corporation is a legal entity owned by shareholders meaning the corporation is liable for all the actions and debts the business incurs not the shareholders. In a legal sense, it is a “person” distinct from its owners. Corporations can sue and be sued, enter into contracts, issue debt, borrow money, and own assets, such as real estate. There are three types of corporation General, S corporation and Limited Liabilities Company (LLC).

The general corporation, or C Corporation, is the form of a corporation owned by shareholders that are formed by filing incorporation documents with a state and paying the related filing fees. An S corporation is a special Internal Revenue Service (IRS) tax status corporation that has the same process as those for C corporations with the advantage of escaping the double taxation. They are taxed like the partners in a partnership. Public corporations cannot be S corporations because S corporations cannot have more than 100 stockholders. The LLC is a combination of combining the corporate advantage of limited liability protection with the partnership advantage of pass-through taxation. With LLC, tax status income is not taxed at the corporation level but paid at the individual level.