A. SOLE PROPRIETORSHIP:
This is the simplest business structure of which the owner has total control. The owner can make up a fictitious name or use the same name for the business. Sole proprietorship is easy to set up at a minimal cost. The business owner does not need to follow rules or regulations of others but their own and can set up their own schedule. Proceeds can be directly deposited into the owner’s bank account and the funds are freely allocated between business and personal accounts.
The sole proprietor, however, is a subject of unlimited liability for debts, losses and other business obligations when the business goes sour. The business owner also faces challenges in raising capitals from investors because there are no stock options. Banks are reluctantly to make loans to these businesses due to the perceived lack of liability to repay the loans.
I. Liability: the business owner is held responsible and liable for all business debts and losses when business goes under. A creditor may also go after your business to satisfy the unpaid personal debts.
Besides the debts, the sole owner is also responsible for any damages, injuries that occur as result of any omission or negligence of the business.
II. Income Taxes: the business owner doesn’t need to file separately for personal and business income tax returns. The business owner also can claim deductions on their business.
III. Longevity/Continuity: business existence depends on the owner. When the owner dies, the business dies.
IV. Control: the sole owner has the full control of the business from financing planning, personnel to projects and schedules.
The sole owner is his or her own boss.
V. Profit Retention: Business proceeds translate into personal income for sole proprietorship. The owner can withdraw the funds for personal use or retain them in the business account. It is entirely up to the sole proprietor’s choice.
VI. Location: a sole proprietorship business can start anywhere at home, a small office or even a computer and the internet.
VII. Convenience/Burden: a sole proprietorship business is easy to start and the business can take place anytime and anywhere after a simple registration process with the municipality.
However, this kind of business is hard to expand and faces challenges of attracting investment.
B. PARTNERSHIP: Partnership is another form of business structure where two or more people co-own the business. Each partner contributes money, labor, property or skill and, in return, the partners share in the profits and the losses of the business. This kind of business is inexpensive and rather easy to set up when the partners agree on the terms of business. The partners can rely on each other’s strengths and skills to operate the business together.
With the shared responsibility, the partners can raise capital or apply for loans more easily. The partners, however, might face some disagreement and differences in operating their business. They also need to pay attention to the shared profits because unequal distribution can create discord among the partners.
I. Liability: all partners are personally liable for the debts of the business. Creditors can go after any partner when they want to remunerated.
II. Income taxes: partnership business form is not a separate tax entity. Each partnership has to report their incomes on their personal income tax returns.
III. Longevity/Continuity: partnership ends when one of the partners dies or withdraws from the business.
IV. Control: the partners have the full control of their business when agreements are easily reached. Business continues or gets transferred when a partner withdraws or dies depending on the initial agreements.
V. Profit Retention: profits are distributed between the partners. Losses and profits are filed through personal income tax return.
VI. Location: partnership organization is easy to form and it doesn’t require the partners to file a formal business agreement with the state.
VII. Convenience/Burden: this partnership form works well when both partners agree and utilize each other’s strengths to operate the business.
C. LIMITED PARTNERSHIP:
Limited partnerships are united by two or more people to run a business in which at least one person acts as the general partner with management authority and personal liability, and at least one person plays the role of limited partner or a silent partner with no management authority and is not personally liable for debts. All partners must agree orally or in writing to form the business.
I. Liability: the general partner is mainly responsible for the debts of the business. The limited partner is only responsible up to the amount of his or her investment.
II. Income Taxes: each partner can report taxes separately or through each personal tax return.
III. Longevity/Continuity: existence of the business is dictated by the terms of the agreement. A limited partner can transfer his or her interest to someone else without affecting the business. A general partner, however, may dissolve the business when he or she withdraws from the business.
IV. Control: the general partner controls the business operations and the limited partner is considered as investment.
V. Profit Retention: All profits go to the partners but the amount will be distributed according to the investment and agreement of the partners.
VI. Location: the business has to register with the designated officer of the state where the business operates VII. Convenience/Burden: this kind of business is easy to establish and additional funds can be gathered with new limited partner without affecting the business.
The business dies when one of the general partners leaves, dies or becomes legally incompetent.
D. REGULAR C CORPORATION: When a business forms a C Corporation, all of its owners are considered as shareholders. A corporation is legally viewed as a separate business entity or an individual taxpayer. Shareholders’ liability is limited to the amount of their investment. However, a corporation is subject to double taxation, which requires the business to pay its own corporate tax and the dividends will be taxed when distributed to shareholders.
I. Liability: shareholders are only responsible up to the amount of their investment and their personal assets are untouched in the event of business failure.
II. Income taxes: a corporation pays its own corporate taxes and once the dividends are contributed to shareholders who are required to report on their tax returns.
III. Longevity/Continuity: corporations can continue in perpetuity. Changes in the owners or shareholders do not affect the existence of the business.
IV. Control: shareholders elect a board of directors which operates the business of a corporation.
Shareholders approve the company’s bylaws and the directors issue stocks.
V. Profit Retention: corporation profits are distributed in 2 ways: investment back into the company and/or dividends to shareholders.
VI. Location: company’s branches can be anywhere because corporate tax stays equal everywhere in the States.
VII. Convenience/Burden: corporations are easy to raise funds by issuing stocks. The company can operate even when shareholders withdraw from the company. However, “double taxation” is the biggest burden for corporation and it is a complex business to operate with high costs.
E. S-CORPORATION : An S corporation is a hybrid business entity that is elected under the Subchatper S from the IRS. Unlike C Corporation, S Corporation is not subject to ‘double taxation”. All the profits and losses are passed through and reported on shareholders’ personal income tax returns. This business form is hard to expand because it is required to have less than 100 shareholders.
I. Liability: like C Corporation, shareholders of S Corporation have limited liability and they are only responsible up to the amount of their investments.
II. Income Taxes: S corporation doesn’t pay corporate taxes because the taxes are paid by shareholders in the form of dividends.
III. Longevity/Continuity: its business life is unlimited. Any changes in shareholders do not affect the business operations.
IV. Control: Like a C Corporation, a S Corporation is controlled by the board of directors. Shareholders, however, have more influence in the business policies and are required to hold corporate meetings. V. Profit Retention: profits are distributed to its shareholders.
VI. Location: S corporation must be a domestic company in any state
VII. Convenience/Burden: this business form allows to pass through the taxation and limits the liability of its shareholders. It, however, is not easy to organize because of its extra required paperwork. It also limits the number of shareholders to 100 and the owners are required to hold meetings, which can be difficult. VIII.
F. LIMITED LIABILITY COMPANY: A Limited Liability Company (LLC) is a business form that blends the limited liability of a corporation and the pass through taxation of a partnership business. An LLC doesn’t pay corporate tax and its liability does not affect the owner’s personal assets when debts incur.
I. Liability: business is only responsible for debts that are limited to the extent of the investment in the company.
II. Income taxes: like a partnership or sole proprietorship, an LLC doesn’t pay taxes but pass through their profits or losses to its shareholders who are responsible for reporting their income on their personal tax returns
III. Longevity/Continuity: life of the business depends on a member who owns 50% of the LLC or more. The business is dissolved when this member leaves or withdraws from the company. Other embers whose shares are less than 50% don’t affect the business operation when they decide to leave the company.
IV. Control: members have control over an LLC based on direct proportion of shares they own, which is called Member-Managed LLC. In addition, an LLC can hire a manager to control its business, which is called Manager-Managed LLC
V. Profit Retention: profits are divided among its members according to their stake.
VI. Location: an LLC can operate in other states while registered in one but extra paper work might be required. Local taxes and other rules need to be applied.
VII. Convenience/Burden: as an LLC, you can select various forms of profit distributions. There is no corporate tax to pay but members have to report their profits through their personal tax returns. The business dissolves when a member with the most shares withdraws or dies.
MEMORANDUM To: Mr. Jack Johnson From: Daniel Le Re: Business Organization Form Date: September 7, 2013 After our meeting last week and some information I gathered in this report, a Limited Liability Company (LLC) form of business is the perfect fit for your business expansion. With LLC form, you will reap great benefits for your business expansion: 1.
An LLC form will limit your liability. Because you have expressed your concerns with being at high risk with outsourcing some of the contracts, I think an LLC is a wise choice for protecting your personal assets. With extra business liability insurance policies you purchase for your business operations, you are responsible only to the stakes of your business when a lawsuit or debt incurs.
2. As a, LLC, you don’t pay corporate taxes. The emolument will be distributed to the members and they are responsible for reporting them as incomes on their personal tax returns.
In addition, there is great flexibility in how profits can be collected or distributed among its members. You can limit your income taxes by investing the profits back into your company to further develop it.
3. With this business form, you can attract others for further investment into the company. Your family members can invest and become the members of the company. You can also hire a family member to become a manager to run your business and operate the company on the model of Manager-Managed LLC.
4. In our meeting, you expressed your concern about expanding your business to a neighboring state. With LLC form, you can do that. You need to fulfill all of the requirements of the state to operate as an LLC. When your business becomes successful, you will attract more investment or provide more services to the clients in the new state. Here are a few suggestions you need to be prepared for switching your current business to an LLC: File and draw up the articles of organization with the state for an LLC Register your business name
Open a new bank account with your LLC name Register for federal Employer Identification Number (EIN) for tax reporting purposes Transferring your current business to an LLC can be overwhelming but with enough preparations you can achieve a smooth transition. If you’re still not sure how it works, think of it as having a sibling. Like you and your sibling, you and your LLC are related but if someone sues your LLC business, who is responsible for the lawsuit? It’s your LLC business, not you.