Corporation and Profit Retention Essay
Corporation and Profit Retention
Sole Proprietorship: This is by far the most common form of business. It is the most common because it is the easiest to form. In order to create this type of business one simply has to “hang their shingle out” and let the commerce commence. However with such limited oversight also comes unlimited liability.
Liability- Liability exposure with sole proprietorships is a huge draw back.. The owner and the business, legally, are one and the same. This leaves all the owners property ( and the business assets since they are one and the same) at risk.
Income Tax- There are no real tax advantages at this level. It is known as a “pass through” entity. The income that is generated passes through the business to the owner. Taxes are paid at the individual level.
Longevity- Unless the owners will provides specific direction in the contrary, the business is directly linked to the owners health. Since the owner and the business are legally indistinguishable from one another when the owner dies the business also dies.
Control- Unlimited control is another attractive quality of Sole Proprietorships. Since legally there is no separation you may do with the company as you see fit. From what services are offered to what the logo looks like all decisions are the owners to make.
Profit Retention- Since the owners efforts alone are responsible for the amount of profit generated, they keep it all. After the employees ( if any ) are paid what is left is the owner’s. Because they have total control, they may reinvest it in the company or they make take it all out.
Location- Since there is no legal paperwork filed with any state agency, moving locations is as simple as driving to another state and setting up shop. That being said if you required state license in the original state, you would need the equivalent in the new location.
Convenience/Burden- There are no legal documents that need to be filed with any state agency. Owner and company are indivisible so there is no paper work saying otherwise. At the most you may need to file a Doing Business As (D.B.A. ) with your local tax office to allow you to open a bank in the company’s name.
General Partnership: This type of company is usually formed when two or more individuals with different skill sets get together. Each participant brings with them their own experience and skills in order to create a new venture. While the liabilities are not bore alone, the partners are not sheltered from them.
Liability- While they are split in a predetermined percentage, the liabilities of a General partnership are unlimited. There is nothing that is off the table including your personal assets.
Income Tax- There is no real tax shelter provided at this level. Income that is generated is “passed through” to the partners. They will pay taxes at the individual level. There are however, various tax forms that need to be filled out.
Longevity- When a partner dies the partnership ceases to exist. The partners may not pass on the original partnership agreement to their heirs. There may be a buy/sell clause in the articles of partnership.
Control- Complete control is given up to a vote of the general partners. If there is no consensus made, the articles of partnership should dictate how the disagreement is handled.
Profit Retention- After the business debts are paid, the partners split the net profit. The articles of partnership will usually dictate the percentages, and if no mention is made it is assumed it is split evenly.
Location- The fact that a partnership is not it’s own legal entity makes it relatively easy to move. If there is a market in a new location there is very little that prohibits moving.
Convenience/Burden- While no state/federal documents are required, you will need an “Articles of Partnership” drawn up. This will act as the bylaws/charter for decisions and operations moving forward. There are a few tax forms that need to be completed by the partners at the appropriate time.
Limited Partnership: This type of business is used more as an investment vehicle than a job or career. It allows an investment to be made and fostered from a distance. If you are the limited partner though, you may not have a hand in the day-to-day activities or management.
Liability- As a limited partner your investment is your only liability. That being said your stake in the partnership is an asset that personal creditors may come after.
Tax- As a limited partner your revenue from the company is federally taxed at the personal level. There are various situations to avoid taxation as a corporation. General partners must pay self employment tax.
Longevity-A limited partnership is sometimes used as an estate planning tool. Therefore the continuity from generation to generation is very customizable. The limited partner may die and this will have very little impact on the business.
Control- As a limited partner you have no say in the management or daily activities of the business. You may not bind the partnership to anything as a limited Partner. A general partner runs the daily operations and makes the management decisions.
Profit Retention- If you are a limited partner you are entitled to the agreed upon amount of profit only after the general partner is paid. As a limited partner you have very little influence over the amount of profit generated.
Location- Limited partnerships can change locations but it is inconvenient and could be considerably more expensive. Some states mandate the filing of tax forms for limited partnerships, not to mention some states have state income taxes.
Convenience/ Burden- Articles of Partnership are needed. There are some states witch require registering limited partnerships, and strict attention should be paid to the activities witch the IRS considers “corporate.”
C Corporations: C Corporations are a legal entity unto themselves. They shield the share holders, board members, and employees from liabilities. They have the ability to raise capital by selling portions of the company, and huge tax loopholes to shelter revenue. With all the loopholes however are huge tax burdens, often over 30% of the net.
Liability- A corporation is a legal “being”. It can be sued, or bring legal action against someone. Therefore it provides a large umbrella for its owners and employee’s alike. When malfeasance occurs it will absorb the effects.
Income Tax- Being it’s own legal entity is not cheap. The state that the business is located in could very well impose taxes, as well as the federal corporate tax rate witch is the highest in the world. Couple this with the fact that the employees that work there are then taxed again at the individual level, and you see how quickly things add up.
Longevity- Corporations have the potential to last forever. Due to the fact that authority is so decentralized, one person getting ill or leaving the company is no more than a bump in the road. You could pass on your shares or stake in a company through proper estate planning.
Control- If you were to incorporate your business it could be set up so that your family always had a seat on the board or always had voting rights at a shareholders meetings. However, especially in a public company, you must act in the best interest of the shareholders. No one person runs a corporation alone, there are shareholders, and usually board members. Authority being so decentralized makes complete autonomy very rare.
Profit Retention- As there are many owners there are also many hands in the pot. The fact is that each shareholder is entitled to a portion of the company’s profit in direct relation to how much of the company they own. In closely held corporations this could be 3-4 individuals, but in a multi-national company this could be millions of people.
Location- The federal government does not create any corporations. This is done at the state level. For a corporation to go from one state to another they would have to file as a foreign corporation. This can get expensive and legally “sticky” when deal with different state laws and agencies.
Convenience/Burden- To incorporate a business is relatively easy. The challenge and burden comes in keeping it running and staying on the proper side of legal. It must file it’s own tax returns, contend with state and local laws, maintain the strictest accounting practices, conduct annual shareholders meetings, all while turning a profit for its shareholders. No small task.
S Corporations- S Corporations are a legal entity. They offer a legal umbrella to their employees and owners as well. They have the ability to raise capital by selling off small pieces of themselves as stock. The S corporation has to follow the same strict accounting and reporting procedures as corporations, however their income is not taxed the same.
Liability- An S corporation is a legal “being”. Therefore it provides a large umbrella of protection for its owners and employee’s alike. When malfeasance occurs it will absorb the effects.
Income Tax- An S corporation is a specialized tax situation. It has most of the reporting and recording requirements of a C corp. but allows for the “pass through” of revenue to the individuals. The company The S corp. designation is however for federal purpose’s only, the state the company is in will certainly have it’s own laws.
Longevity- S Corporations have the potential to last forever. Due to the fact that authority is so decentralized, one person getting ill or leaving the company is no more than a bump in the road. You could pass on your shares or stake in a company through proper estate planning. You could also have a seat on the board reserved for your family/heirs.
Control- The fact is when a S Corporation is formed the corporation has to do what is best for itself. A lot like an autonomous person, it must continue to look out for its own survival. Normally one person does not dictate the course of a Corporation, there are several in charge of this.
Profit Retention- Since there is no one individual at the pinnacle the profits are distributed through out. If there is a board of directors, share holders, stock owners, all of these individuals are entitled to a portion of the profits.
Location- The federal government does not create any corporations. This is done at the state level. For a corporation to go from one state to another they would have to file as a foreign corporation. This can get expensive and legally “sticky” when deal with different state laws and agencies. Couple this with the fact that states deal with S corporations wildly different, from treating them like the federal government to not recognizing them at all.
Convenience/Burden- To incorporate a business is relatively easy, although the fee’s can add up. S corporations must avoid several pitfalls so as they are not taxed like C corp.’s. This and the fact that the accounting is so stringent, they may not have over 100 share holders that meet once a year, and the laws so wildly differ from state to state make the burden factor high indeed.
Limited Liability Company- With the protection of a corporation and the flexibility of a Sole Proprietorship, the LLC has become extremely popular since it’s recent creation. However they are not a vehicle for taking a company public, capital can be difficult to raise because the members will have to guarantee the loans, and the members must take care not to intermingle funds.
Liability- The LLC, like a corporation, is it’s own legal “being”. It provides an umbrella for it’s members to operate under and not fear liability claims against themselves personally.
Income Tax- LLC’s are in the unique position of deciding how they want to be taxed on a yearly basis. Most of the time LLC’s can function like other forms of small business. The income will pass through to the members who will then pay at the individual level. It does however have the option of paying at the corporate level so as to lower the tax bracket. (This is because the highest individual tax rate is higher than the corporate tax rate.)
Longevity- If a member of an LLC dies or retires action will be determined by the operating agreement. This could include a buy/sell clause for the heirs, a transfer of ownership, or whatever state law dictates. In most cases
Control- The fact that an LLC could be run by just one person means that he /she could have just as much control as a sole proprietor. The catch is with the finance’s. The finance’s must be maintained “ at arms length” to maintain the corporate veil of protection. So long as this is done, the majority member/owner of the LLC has complete control.
Profit Retention- The profits generated by the business flow to the members. The amount is in direct correlation with the amount of ownership each member holds.
Location- All 50 states allow LLC’s now but the law varies wildly. Some states still want an ad run in the paper when a business is formed and others require a single 1 page form. To move from state to state can be done but the local laws might be prohibitive.
Convenience/Burden- The LLC doesn’t require anywhere near the amount of accounting as a corporation. The articles of organization needs to be filed to create it and then the operating agreement dictates how it’s run.
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 2 November 2016
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