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.
1. Minimal legal costs to forming a sole proprietorship.
2. A sole proprietor has complete control and decision-making power over the business.
3. Few formal business requirements.
1. All responsibilities and business decisions fall on the shoulders of the sole proprietor.
2. Creditors for the business can go after the sole proprietor’s personal assets.
3. Limited finance options.
The sole proprietorship is the simplest form of business, which is inexpensive and easily set up. Businesses that operate on a shoestring budget with virtually no debt, such as a small lawn-care business, can present very little financial risk to company owners. Lawn-care business with historically low rates of legal trouble do not necessarily need protection from legal liability. Each state, city, and county have their own laws about which business licenses are required. A sole proprietorship may only need a business license from the city or county, and a occupancy permit or fire department permit.
One has to make sure that the right to use the chosen business name by checking with the appropriate city office, get a fictitious business name statement by registering it, apply for an employer ID number. with the IRS using Form SS-4, and apply for a state ID number with the Department of Revenue if the Business is paying wages to employees. The advantage of sole proprietorshop Starting a sole is much less complicated than any other forms of business, and also much cheaper. The proprietorship can be named after the owner, or a fictitious name can be used to enhance the business’ marketing. The disadvange is the business owner will be held directly responsible for any losses, debts, or violations coming from the business. What that means is big liabilities!
1. With more than one owner, the ability to raise funds may be increased.
2.A partnership may benefit from the combination of complimentary skills of two or more people.
3..Partnerships can be cost-effective as each partner specializes in certain aspects of their business.
1. Since decisions are shared, disagreements can occur.
2. The partnership may have a limited life; it may end upon the withdrawal or death of a partner.
3. A major disadvantage of a partnership is unlimited liability like sole proprietorship.
A good example of a partnership business is the same as the sole proprietorship. Lawn mowing business or clothe sewing or alternation business would be ideal for partnership because of the low liability Conerns. The procedures that needed to start a partnership are to obtain all required local, state and federal licenses and permit, register the name of the company in the county where the partnership does business, get an Employer Identification Number from the IRS using Form SS-4, get an ID number from the state Department of Revenue if neccesary, and a written agreement between the partners determining a financial plan, management responsibilities, and the rights and obligations of individual partners. One of the advantage of partnership is the business will benefit from skills from two or more People.
One partner can be very good at finance which he or she can oversee the day to day AP, AR, and budget. The other partner can be good operational and/ or people person where that partner can run the day to day operation to make sure the business go smoothly. The major disadvantage is disagreements will happen (is not when it happens). Everyone that runs a business always has his or her own idea of the way the business should be. Rather it is a major or minor disagreement, it is up to the partners to come up with somewhat of a middle ground. I see too many good business ruined because partners will not compromise.
Limited Liability Partnership
1. No double taxation.
2. Ability ot directly manage a partnership.
3. Limited liability.
1. LLPs vary in legal requirements and liabilities by state, are not recognized in many states.
2.Lack the ease of ownership transfer.
3.Individual partners can commit the partnership to formal business agreements without the consent of the other partners.
The LLP is vert popular form of organization among lawyers, accountants, architects, and other professionals. The formation of an LLP as a newly established business is very similar to the creation of a general partnership. It should be noted, however, that the specific steps and requirements to start an LLP vary from state to state. And because if LLP has to register with each state that it do business with, go to the Secretary of State site in the state that ones want to do business. The LLP should also obtain. a Federal Employer Identification Number from the IRS. Finally, the partners of the LLP should make sure to get all the necessary business permits because each states had different laws and regulations.
One of the big advangage of LLP is that LLP is not subject to double taxation as are standard to corporations. All profits of the partnership pass through the company directly to the partners, subject inclusion in their personal income tax returns. The disadvantage is that because of the tax benefits and limited liability protection, many states restrict the type of companies permitted to form LLPs. Some states, needing to keep revenues healthy, have implemented a tax on limited liability partnerships.
Limited Liability Company, (including the single member LLC)
1. No double taxation.
2. Limited liability.
3. Flexible management structure.
1. Limited finance resource (compared to corportation).
2. Expensive filing and license fee.
3.The profits of a LLC are subject to self-employment tax.
LLC would fit for someone that wnat start a real estate business or a business that the company knows that the company will lose money for at least two years where those losses can pass on to the owner(s) to take advantage of the tax break. Forming an LLC is as easy as filing organizational documents with a state and paying the related filing fees. Again, the member(s) of the LLP should make sure the licenses and permits need with the local authorities. Also, a Federal Employer Identification Number from the IRS is a wise decision. LLC has enjoyed the tax advantage like an LLP. The member(s) has The advantage of pass-through taxation.
With this tax status, the LLC’s income is not taxed at the entity level. On the flip side, raising capital can be difficult for an LLC because the company does not have the ability to issue stocks and bonds like a corporation. This means the company has to rely on the contributions of its members to finance its business activities. A member of the business may have to take out personal loans to secure financing for the business, which means he must have good credit.