Is the simplest and most common business structure. There is no legal distinction between the proprietor and the business, which means it is autonomous. You are entitled to all profits and responsible for all your business’s losses and liabilities. Liability- This falls directly on the owner. All debts, liabilities and losses fall on the owner. The owner’s assets can be used to alleviate the business’s debt. Income taxes- All income generated through a sole proprietorship is taxed by the Internal Revenue Service. This is reported on the owner’s personal tax return.
Longevity/Continuity- A sole proprietorship exits only as long as the owner is alive or until the owner decides to sell or close the business. Control- The control belongs entirely to the business owner, who also assumes the risks of the business. Profit Retention- All profit generated is income for the business owner. This profit will be used to satisfy all debts and obligations of the business. Location- There are no federal laws on location for a sole proprietorship, although state law will differ according to each state. Convenience/Burden- Sole proprietorship is one of the easiest forms of business to get started.
The owner of the business also has full control over the company. The main burdens with a sole proprietorship are that it is harder to get business related financing and that all debts, obligations and legal issues fall on the owner. General partnership: A general partnership is a association of two or more people establishing a business with the goal of earning a profit. There is little formality involved in creating a partnership as it is one and the same with its owners. Liability- Owners of a general partnership have unlimited personal liability.
Each partner is liable for their actions, actions of other partners and actions of their employees. They can also be sued as a group. Income taxes- A general partnership has pass through taxation meaning that each partner will pay a percentage of taxes based on income percentage. Each partner will pay taxes based on income allocation set in the partnership agreement. Longevity/continuity- Depending on the number of partners in a general partnership, the partnership can be dissolved and reformed. If there are only two owners… the partnership can be dissolved when the agreement ends.
Control- Each partner has equal control of the business unless a agreement has been set that one partner will maintain more control than another. Profit retention- Profits made by the business are distributed equally among partners unless a agreement stating otherwise exists. Location- Like a sole proprietorship, There are no federal laws on location. Each state has different laws and the business should be licensed accordingly. Convenience/Burden- With a general partnership it may be easier to obtain financing because there are more owners than a sole proprietorship. It is also relatively easy to start this type of business.
A downfall would be that you are legally responsible for the actions of your partner whether you have knowledge of them or not. Limited partnership: Consists of two or more people, with at least one general partner and one limited partner. The general partner has unlimited personal liability while the limited partner’s liability is dependent on the amount of their investment in the company. Limited partnerships also have to be filed with the state to be formed. Liability- The general partner has unlimited liability and the limited partner’s liability is limited to the amount they have invested in the business.
When the partnership is dissolved the limited partner is paid before the general partner but not before the business debts are taken care of. Income taxes- Like a general partnership, a limited partnership can have pass- through taxation where each partner pays taxes according to the allocation of profit. There are certain criteria a limited partnership has to meet in order to qualify for pass-through taxation, otherwise they would be taxed as a corporation. Longevity/Continuity- The death or absence of the general partner will dissolve the partnership unless stated in a prior agreement.
The death or absence of a limited partner will not dissolve the partnership but the shares of the limited partner will belong to their estate. Control- The general partner(s) maintain control of the business. They have equal authority unless otherwise specified in a agreement. The limited partners do not maintain any control in the partnership. Profit retention- The general partners share profit and losses equally. The limited partner(s) will receive a amount of profit according to their investment and any agreements. Location- A limited partnership is subject to the laws of each state.
There are no federal guidelines for location. Convenience/Burden- Like a general partnership a limited partnership is easily formed and can enjoy pass through-taxation. It can also be easier to get financing with a limited partnership. A downfall of the limited partnership is that the death of a general partner can dissolve the partnership unless a prior agreement has been established. Regular C corporation: A regular C corporation is the most is the most sophisticated form of business and most common for large companies. It gets its name from the 1986 IRS code.
The corporation, not individuals, are liable for the debts and obligations. Income taxes- C corporations are taxed on the revenue they produce. The federal tax is minimum 15% to maximum 35%. Longevity/Continuity- Corporations have very long life spans and can go through many CEO’s, CFO’s and other executive personnel. Control- Control is shared by the company’s shareholders and a board of directors. A annual meeting has to be held along with records of said meetings. Profit retention- Profit is given to the shareholders through dividends.
Location- There are several state and federal filings for the location of a corporation. Convenience/Burden- With a corporation funding and financing can come easily by selling stock or credit. A corporation also has a long life span. A downfall is that it is very complicated to run a corporation and there are a lot more expenses involved. Also has a double taxation. S-Corporation: This is similar to a C-corporation in profit and liability. The differences are that there is no dual taxation but they must meet certain requirements. A s-corporation can only have a certain number of shareholders and can have only one class of stock.
Liability- Similar to a C-corp, the corporation is liable for debts and obligations. Income taxes- The owners and shareholders pay taxes on the income produced by the business. Longevity/Continuity- Same as a C-corp, a S-corp can have a long life span and see many different executives. Control- Shareholders select a board of directors and they elect officers to run the company. Shareholders of a S-corp must be United States citizens. Profit retention- Profit is divided up to shareholders as dividends. Location- There are different state and federal filings for a S-corp.
Some states will not honor the tax exemptions set by the government. Convenience/Burden- A S-corp is easier to establish and gets to use the favorable tax status. Burdens would be that it is limited to 100 shareholders and they have to be from the United States. Limited liability company: This type of company has some qualities of both a corporation and a partnership or sole proprietorship. It has limited liability like a corporation but it can use the pass-through taxation like a partnership. Liability- A LLC (limited liability company) owners have limited personal liability for the company’s debts.
Their personal assets cannot be used to settle obligations or debts of the company… Similar to a corporation. Income taxes- LLC’s have pass-through taxation like a partnership has. The owners are taxed on a personal level. A LLC does not pay federal taxes. Longevity/Continuity- The lifespan of a LLC is limited. If a owner retires, dies or quits then the LLC is dissolved. Unless there is a prior agreement made. Control- Owners have complete control in a LLC. They may hire managers to run everyday business practices. Profit retention- Profit is provided among owners according to their ownership percentage and any agreements made.
Location- A LLC has no limitations on location but must follow state licensing regulations. Convenience/Burden- A LLC enjoys no personal liability and a pass-through taxation. A burden would be that a LLC has a limited lifespan. LIT1 Task 1B MEMORANDUM TO: Owner FROM: Nathaniel Nitti SUBJECT: Business type recommendation DATE: January 13, 2014 After carefully reviewing the information you provided me concerning what type of business entity you should establish, I would definitely suggest forming a Limited Liability Company (LLC). Let’s look at some of the advantages of a LLC and how they match the concerns and questions you have.
One of your main concerns was financial liability if an accident or injury should occur. With a LLC no financial liability falls on the owner(s), it lies all with the company itself. Your personal assets would all be protected from lawsuits, debts and obligations. This is also true in a instance that your business should fail. You would have no personal liability if this should happen. Another concern you had was expanding your business and obtaining additional capital. With a LLC you can expand to a different state by forming a new LLC in the new state or form the same LLC in the new state and merge the two current LLC’s together.
If you wanted to discontinue business in your current state a LLC would allow you to liquidate in that state. As far as obtaining more capital… a LLC allows individuals or entities to buy into your business as a member/partner. You are able to appoint employees or family members as officers to run the company’s day to day operations. This also allows for your family to maintain control of your company in the event of the owner’s death. As far as profit dividing and taxes go, the LLC has advantages in those areas as well. Profit can be divided between partners equal to the percentage of their ownership in the company.
You can also have made a prior agreement for how profit will be divided as well. As owner you can also decide if you want to reinvest your profit back into the business. A LLC also enjoys pass-through taxation meaning that taxes on profits from the business can be claimed on the partner’s/owner’s personal tax return. You can also claim depreciation and business losses on your personal tax return as well. I hope that this information is helpful in your journey of choosing a business form and expanding your business. Thank you for allowing me to assist you in this matter