There are several types of organizational forms that a business can choose from. Each form presents pros and cons that may or may not be suitable for a particular business. This report will review characteristics such as: liability, income taxes, longevity or continuity, control, profit retention, location, convenience and burden for each business form and how they differentiate from the different types of organization forms.
A sole proprietorship is the most common business form. A business is a sole proprietorship if it is not incorporated, meaning that a separate legal entity is not created for it.
An advantage of forming a sole proprietorship is that it is the easiest and least expensive business form. a.Liability: A sole proprietorship does not excuse the owner from personal liability. If the business fails, the owner is responsible to the creditors and may lose personal assets. b.Income Taxes: The profits and losses of the business go through the owners’ personal tax return.
This can positively or negatively affect the owner depending on what the profit and losses of the business are and what other sources of income the owner may have. c.Longevity or continuity: If the owner dies the company cannot continue on.
If the owner decides to leave the company, then the company will also cease to exist. d.Control: In a sole proprietorship the owner has full control of the business. e.Profit retention: The owner receives all profits in a sole proprietorship. f.Location: When a business is a sole proprietorship the owner can move the business to any location. The only fee may be if changing states or county and the business is operating under a trade name, then the owner will have to pay the relatively small fee to operate as a DBA (“Doing Business As”). g.Convenience or burden: There are not any extra burdens when operating as a sole proprietorship. The owner does not have to meet any special reporting or regulatory requirements. There are not any special tax requirements or restrictions. The business profit and losses are filed with the owner’s regular tax return.
A general partnership is between two or more owners of a business that is not incorporated. a.Liability: Each partner is held personally liable for the debts of the business regard less of fault. b.Income Taxes: Taxes are reported on each partner’s personal income tax return, so any profits made by the company are treated separately from the individuals’ income, but included. c.Longevity or continuity of the organization: A general partnership lacks continuity. If a partner leaves and his or her shares cannot be bought by the remaining partner, then the business must close. If a partner dies, their heir can be paid for the value of their share of partnership, but cannot continue with business.
d.Control: In a partnership control is equal between all the partners. This can be difficult when a company has many partners or partners that don’t know each other. If a change is made without consulting with the other partners that can cause friction between the partners, so it may be best to include all partners in all decisions. e.Profit Retention: Profit is distributed equally between all partners and so is any loss. f.Location: A general partnership is fairly easy to setup and move. There are not any special forms that need to be filed with the state or county to form a general partnership. There only has to be at least two people to make up the partnership. g.Convenience or burden: Since there are not any special filings that need to be done for a general partnership, it is very convenient.
A limited partnership is partnership that does not hold the partners personally liable for the business debts. a.Liability: Limited partners are not held personally liable for the business debts. b.Income Taxes: All profits and losses are passed through each partners’ individual income tax return. The company does not pay taxes. c.Longevity or Continuity: Limited partners can freely enter and leave the company. The company can continue if a limited partner leaves. d.Control: In a limited partnership there are limited partners and general partners.
The general partners manage the partnership. e.Profit Retention: Profits are distributed to the partners based on their contribution and pass through to the partners, who in turn report the profits on their individual tax return and pay taxes at their individual rate. f.Location: When a LLP is formed or if it moves, then it must comply with state filing requirements. A LLP must file a Certificate of Limited Partnership with the appropriate state agency. g.Convenience or burden: A LLP can be convenient because it attract capital easily, it offers limited liability to partners, easy transferability of partnership, and pass-through taxation.
A C- corporation or a “privately held corporation” is a company whose stock is not publicly traded. a.Liability: A business owner is not personally liable for the company debts and is protected from lawsuits and judgments against the business. b.Income Taxes: C-corporations are double taxed. The IRS taxes the company profits and tax any dividends paid to shareholders. c.Longevity or Continuity: Even if the owner leaves or dies, the C-corporation being a separate entity can continue to go on. d.Control: Management is shared between the shareholders.
e.Profit Retention: Profits are usually kept within the company and not distributed to shareholders. f.Location: A C-corporation must follow state filing requirements in each state that it wishes to setup in. This can be very costly. g.Convenience or burden: An advantage of a C-Corporation is that it provides the best protection for the owner against the company debts. A disadvantage is that it can be costly to establish.
S-corporations are a separate entity from the owner. It offers the owner limited liability, but the tax structure benefit of a partnership. a.Liability: The owner an S-corporation is not held personally liable for any debts or judgments incurred by the company. b.Income Taxes: In an S-corporation, the profits and losses of the company are passed through to the owners and shareholders and reported on their personal income tax returns and taxed at their individual rates. The company itself is not taxed.
c.Longevity or continuity: Like a C-corporation an S-corporation can continue on, if the owner leaves or dies. d.Control: A board of directors manages the company through officers. e.Profit Retention: Generally in an S-corporation the profits are passed on to the shareholders. f.Location: An S-corporation must follow state filing requirements in any state that it wishes to setup in. g.Convenience or burden: An S-corporation can be convenient, because it provides the owner and shareholders protection from company debt and they save on paying taxes on profit, but it can be costly in setting up. Limited Liability Company
A Limited Liability Company is similar to an S-corporation in that it offers the limited liability of a corporation, but the tax structure benefit of a partnership. a.Liability: Owners and shareholders are protected from personal liability for the business debts and judgments. b.Income Taxes: Profits and losses are passed through to the shareholders and filed on their individual income tax returns. c.Longevity and continuity: An LLC can continue if a member leaves, but the LLC must pay the member the value of their interest. d.Control: An LLC is managed by its’ members.
e.Profit Retention: Profits are passed on to the members. f.Location: A LLC must follow state filing requirements for any state it wishes to setup in. g.Convenience or burden: LLC offer a very flexible structure. It also has no limitations on the number and kind of owners. It can be very expensive to form and because it is so new, it can be more complex.
Beatty, J. & Samuelson, S. (2007). Business Law and the Legal Environment: Standard Edition, 4e. Mason, OH: Rob Dewey Web site:
Perez, W. (2009). Protect Your Business Profits by Incorporating. About.com. Retrieved March 20, 2009, from http://taxes.about.com/od/taxplanning/a/incorporating.htm Corey Pierce, J. (2002-2004). Business Startup: Where to Begin & How to Grow. Businessfinance.com. Retrieved March 22, 2009, from http://www.businessfinance.com/books/StartABusiness/StartABusinessWorkbookTOC.htm
subject: Business organization
There are many different types of business forms. After reviewing them all, I have come to the conclusion that an S corporation will be the most beneficial to you company. An S-corporation is a separate legal entity and protects the owner and shareholders from personal liability and offers benefits with its tax structure. This memo will address issues that are important to you and the advantages provided to you by forming an S-corporation. You expressed concern regarding your personal liability and whether or not if the company was to be sued- you did not want to possibly lose all of your personal assets. With an S-corporation you are protected from losing your personal assets if a company is sued for negligence by an employee or subcontractor.
If the company were to default on debts, your personal assets are protected from creditors. Funding will also be fairly easy to obtain with an S-corporation. With an S-corporation, you will be able to sell stock in the company to increase capital assets to help with you expanding. You will be able to sell as much or as little of your companies’ stock as you wish, once a stock value is determined. An advantage to selling you company’s stock beside the increase in capital is that you are also able to retain control of the company when issuing stock.
The profit that your company earns will be distributed to the shareholders, but with an S-corporation, shareholders are only allocated the profit and losses equal to the amount of their investment. The profits and losses are passed through to each shareholder and filed on their individual income tax returns. The company itself is not taxed. Also, with an S-corporation, if you were to pass away, the company would have continuity. The company would not have to dissolve and you. The stock that you own in the company can be transferred to an heir or transferred by the sale of all or a portion of the stock. Based on these findings, I recommend you to form an S-corporation for your company.