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Sole Proprietorship, Partnership, LLC, and a Corporation

Sole Proprietorship, Partnership, LLC, and a Corporation Deandrew Gaskin BUS 311 Professor Timory Naples November 23, 2018

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Sole Proprietorship, Partnership, LLC, and a Corporation

The business entity structure that I would choose for the best organizational form for my business would be an LLC because I can still get the benefits just like a cooperation or partnership does. My personal assets won’t be at risk like my car, house, or savings account if I file for bankruptcy and ongoing lawsuits with my company. As it is stated in the Essentials of Business Law, Limited Liability Companies are a representation of “an attempt to combine the best features of a partnership with the best features of a corporation” (Rogers, 2012). Partnership, LLC, and Corporation all have similar things in common when forming a business. They must have two or more people within the company as well as be for profit and must become active enough to remain or become a real business. Also, they usually need to have some time of liability for covering damages or anything lost. On the other hand, Sole Proprietorship involves only one person running the business and must deal with personal tax, usually doesn’t have any liability sorely because it is self-employed. When setting up a Sole proprietorship, be prepared to devote time, use business methods, and get set up properly so you can make more money, minimize taxes, and avoid potential problems," says Barbara Weltman, a tax and business attorney and author of such books as J.K. Lasser's Small Business Taxes (Wiley 2010). he or she must choose their own name or a trade name that is not taken. Once you have the name that you want. Set up a bank account and a credit card separate from your personal one for your business. Next you must do every year is to file an annual tax return with the IRS to report your businesses expenses and income. Lastly, obtain insurance for everything possible including liability, auto, health and disability coverage. While setting up a partnership, be sure to choose a name that doesn’t violate other trademark companies and can be beneficial to the whole team involved. After choosing a name, determine

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Sole Proprietorship, Partnership, LLC, and a Corporation what state you would like to register to. Most partnership owners suggest that you choose the state where you reside nearby or one you know that you will be making considerable amounts of trips back and forth to. Next, determine whether which partner does what at his position and how much they will be making and come to a partnership agreement. Lastly, open a bank account separate from your personal accounts. When setting up an LLC, you must choose an available business name that complies with your LLC’s rules. Then, you must file formal paperwork, usually called articles of organization (AOO) and pay the filling fee that usually ranges from $100 to $800 dollars depending on your state rules. Create an LLC operating agreement which sets out the rights and responsibilities of the LLC members. Lastly, obtain licenses and permits required for your business. Setting up a corporation is just a similar as the other businesses but with certain differences. First, you must choose a name that complies to your state’s corporation rules. Next, you need to appoint the initial directors of your corporation, file paperwork (AOO) paying a filling fee depending on your state, create corporate bylaws which lay out the operating rules of your corporation, hold the first meeting of the board of directors, issue stock certificates to the initial owners of the corporation, lastly obtain any licenses needed. Sole proprietorship doesn’t have any liability, so it is unlimited. Anything that happens whether it is someone being injured or killed in an accident cause by the owner can be sued for everything he or she may have in their personal belongings. A Partnership has up to two personal liabilities depending on what type of agreement they come to. In a general partnership, a group of individuals enter into a partnership agreement to operate the business together with each partner specifically tasked with a certain role in the operation of

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Sole Proprietorship, Partnership, LLC, and a Corporation the partnership. Each individual partner is personally liable for all debts and judgements against the partnership as a whole. A limited liability partnership however is very different from a general partnership. They do not play an active role in day to day operation of the business. They offer individuals a platform to invest in the business with the promise of return on their investment. Also, in exchange of having some control over the business, partners receive the benefit of protection against liability. LLC has multiple liabilities that they are protected by and can be use if needed. For example, if your LLC’s debts fall short, the creditors can go after anything that is owned by your LLC’s like their bank account and other property but are not allowed to touch or go nowhere no where near your personal belongings such as cars, home, or bank accounts. They are also protected from reckless actions cause by their employees or co-worker if they were to do a hit and run in the company’s car causing the person to bleed to death. One thing they will not be protected by is their own actions for example, one of the owners of the company pizza and waffles knew that the delivery driver did a hit and run not to long ago when he got back but didn’t bother to say anything or do something about the situation. That owner would then be sued along with the coworker for his personal decision. In a Corporation, just like LLC has similar coverage liability but to a certain extent. Owners and managers have limited liability for the company’s debt meaning that people who own and run the corporation cannot be held for personally responsible for the debts of the business but in certain situations, some courts can ignore that limited liability status of a corporation and hold their shareholders, members personally liable for its debts.

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Sole Proprietorship, Partnership, LLC, and a Corporation A sole proprietorship must report all business income or losses on their personal income tax return; the business itself is not taxed separately. The IRS calls this the “pass-through” taxation because business profits pass through the business to be taxed on your personal tax return. A partnership must file form 1065 with the IRS. This form determines whether the partners are reporting their income correctly. They must also provide a schedule k-1 to the IRS and to each partner which breaks down each partners profits and losses. The limited liability company (LLC) is not a separate tax entity like a corporation; instead, it is what the IRS calls a "pass-through entity," like a partnership or sole proprietorship. All of the profits and losses of the LLC "pass through" the business to the LLC owners (called members), who report this information on their personal tax returns. The LLC itself does not pay federal income taxes, although some states impose an annual tax on LLCs. A Corporation is taxed differently then all the other businesses. It is a separate legal entity from its owners, the company itself is taxed on all profits that it cannot deduct as business expenses. Taxable profits consist of money kept in the company to cover expenses or expansion and profits that are distributed to the owners.

Sole Proprietorship Advantages functional and tax advantages compared to other business entities. They do not require separate tax filings They are easier to set then most businesses

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Sole Proprietorship, Partnership, LLC, and a Corporation Owner has %100 control and ownership over the business Disadvantages The owner is personally liable for any debts or obligations of their business. This means that creditors may access the owners personal accounts, assets, and property if their business account cannot cover their debt. If a sole proprietorship wanted to include a partner, he would have to start new business and abandon his current one by forming a general partnership.

Partnership Advantages Two heads are always better than one Your business is easier and faster to set up due to more people being involved. Have a higher borrowing capacity then most businesses. More capital is available for your business Limited external regulation Disadvantages Liability of the partners for debt is unlimited Each partner is liable for their share of the partnership’s debt including all debts that are in it There is high risk of arguments and disagreement among partners and management

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Sole Proprietorship, Partnership, LLC, and a Corporation If a partner leaves or join, you will have to value all the partnership assists which can be costly

Limited Liability Company Advantages Income from your business can be treated as your own There is no limit to the number of owners in LLC, they can have as many as one or hundred owners The amount of money that owners invest into the business need to equal their percentage of ownership. They are not required to have board of directors, annual meetings or strict book requirements. This can free up a lot of time and stress to run your business how you want to. Disadvantages Must work harder to find investors and sources of capital due to the greater legal obligations and state fillings involved to add a new member. Pay more fees to file as LLS’s compared to other businesses. Because of the protections afforded to LLCs, some types of businesses are ineligible to file as LLCs. Banks, insurance companies, and medical service companies are examples of businesses that may be barred from filing in your state. If you plan on having businesses in multiple states, it may be tricky and cause confusion while trying bypass what laws the state has required in order to have business there

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Sole Proprietorship, Partnership, LLC, and a Corporation

Corporation Advantages A corporation’s shareholders are not liable for any debts incurred or judgments handed down against the corporation. They may be able to raise additional funds by selling shares in the corporation May deduct the costs of benefits it provides for its employees and officers Some corporations may be able to elect treatment from S corporation which exempts them from federal income tax other than on certain capital gains and passive income.

Disadvantages Forming a corporation requires more time and money than other businesses Government agencies monitor corporations which can result in more paperwork. Subject to higher overall taxes since the government taxes profits at the corporate level and again at the individual level, if such profits are distributed to shareholders. Furthermore, a company not deduce from its business income any dividends it pays to its shareholders. Double taxation is also one of the disadvantages of the corporate form. The corporation itself is taxed on its earnings, and the shareholders are also taxed when they receive dividends or sell shares at a profit (Rogers, 2012).

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Sole Proprietorship, Partnership, LLC, and a Corporation

References Rogers, S. (2012). Essentials of Business Law [Electronic version]. Retrieved from https://content.ashford.edu/ https://law.richmond.edu/academics/clinics-skills/in-house/ip-clinic/pdf/business-soleproprietorship.pdf https://business-law.freeadvice.com/business-law/partnerships/setup-partnership.htm https://www.justia.com/business-formation/docs/corporation-advantages-disadvantages/...