Legal Issues for Business
Legal Issues for Business
Sole proprietorship is an unincorporated business with one owner who pays personal income tax on profits from the business. The benefit of the sole proprietorship is the tax advantage. The disadvantage of a sole proprietorship is obtaining capital funding. * Liability – As the owner of a sole proprietorship, one is personally liable for all business debts, creditors may sue you personally to satisfy the debt. * Income taxes – As a sole proprietor you must report all business income or losses on your personal income tax return; the business itself is not taxed separately. * Longevity – Longevity depends on the owner and their ability to operate the business; this can be significantly affected if the owner becomes sick or dies. * Control – The owner is in complete control of the business, It is the owners responsibility for all decisions pertaining to business operations * Profit retention – The owner has 100% control of profit retention. They may choose to invest their profits or use it for personal use. * Convenience/Burden – Sole proprietorships are convenient and easy to start up since there are no governing laws. A burden of the business is the decisions made may affect the businesses success are the sole responsibility of the owner.
An agreement formed by two or more persons. They are simple and inexpensive to create and operate, but the owners are all personally liable for any debts or legal actions * Liability – The liability is shared by all partners. If one partner does something negligent, all partners can be held liable. * Income taxes – All partners are responsible to report their earnings on their own personal tax returns. * Longevity – general partnerships longevity is based on the agreement between partners, they can agree to end their partnership as easily as they formed it. With a partnership between more than two partners, the person leaving can agree to sell their portion of the business.
* Control – Control of a general partnership is shared between all parties involved. * Profit retention – All profits of the general partnership belong to the owners. * Convenience/Burden –A general partnership has the convenience of an easy start-up, all partners have a personal interest in the partnership and all profits belong to the partners. A main burden with a general partnership is the personal liability of all debts and legalities.
Limited partnership is similar to a shareholder of a general partnership, being only liable for the amount of investment one has contributed. Limited partners have no management authority. * Liability – A limited partner is only liable for the investments they have contributed, no more no less. * Income taxes – A limited partner reports their share of capital gains and losses on their personal income tax returns. * Longevity – The longevity of a limited partner is based solely on the amount of investment one contributes and their continuation on their investment. * Control – Limited partners generally do not have any control of a general partnership other than their investment. * Profit retention – The amount of profit a limited partner will receive is based on the amount of investment into the company. * Convenience/Burden – The convenience of a limited partnership is one get to share in the profits and losses, but they do not have to participate in the business itself. A limited partners liability is only limited to the investment they have contributed. A burden of limited partnership can be the lack of involvement for the investment one has contributed,
Is a legal way that businesses can organize to limit the owner’s financial and legal liability. C-corporations are taxed separately from the owners. Though they are taxed separately, c-corps have the disadvantage of double taxation, being taxed on the corporate level as well as the shareholder level. * Liability – C-corporations provide limited liability to owners, therefore, owners are not usually responsible for the corporations debts and liabilities. * Income taxes – C-corporations are taxed as a separate entity under corporate tax rates for any business income, any profits made to owners are then taxed again at the personal income tax level.
* Longevity – The life of a C-corporation can exist indefinitely based on the shareholders, by selling of stocks, unlimited number of owners and transfer of ownership. * Control – Control of a C-corporation is held by its shareholders, but may be delegated to a board of directors. * Profit retention -Because a C-corporation’s income is taxed twice, paying taxes on its income and the shareholder’s also paying personal taxes on the dividend income received from the corporation, there is less profit retention than that of a general partnership. * Convenience/Burden – C-corporations have the convenience of unlimited shareholders, as well as no restrictions on who is allowed to become a shareholder. The double taxation of a C-corporation can be a burden to shareholders based on profit retention.
A corporation that does not pay federal taxes. All corporate income and losses are passed through to the shareholders and claimed on their personal income taxes. * Liability – Shareholders of an S- corporation are offered limited liability for the corporation’s debt. * Income taxes – S-corporations do not pay income taxes, instead, income passes through to the shareholders and is claimed on their personal income taxes. * Longevity – Similar to a C-corporation, an S-corporation can exist indefinitely, though S-corporations have regulatory restrictions on the number of shareholders it may have. * Control – The control of an S-corporation is held by its shareholders, but may be delegated to a board of directors. * Profit retention – An S-corporation allows its shareholders to keep more of the earned profits by passing through its income taxes directly to its shareholders unlike a C-corporation which is double taxed.
* Convenience/Burden – S-corporations have the convenience of retaining more of its profits by passing through its income taxes directly to its shareholders, avoiding the double taxation of a C- corporation. S-corporations have the burden of regulatory restrictions, including limiting the number of shareholders; shareholders cannot be corporations and must be U.S. citizens.
LIMITED LIABILITY COMPANY:
A Limited liability company (LLC) is a business entity that offers its owners limited liability. Owners are not personally liable for any debt other than their investment. * Liability – owners of a LLC have limited liability; they are only liable for their investment. * Income taxes – A LLC is not a taxable entity, income taxes are passed through to the owners and their personal income taxes. * Longevity – Limited liability companies can exist indefinitely, they have the option of transferring ownership without restriction. * Control – The control of a LLC can be based on the number of owners as well as the amount of investment one has in the company. * Profit retention – Profits of a LLC is passed through to the owners and is taxed at their personal tax rate, allowing owners to pay less in taxes and retain more profit. * Convenience/Burden – Limited liability companies have the convenience of pass through taxation, allowing the owners larger profits. LLC’s have the burden of varying restrictions from state to state, there are different renewal fees and franchise taxes that must be paid and LLC’s must pay self-employment taxes.