Business Entity Selection

Business Entity Selection

People go into business to make money. Unfortunately, not everyone considers the proper way to structure his or her business so that it can make money in an optimal way while operating within the framework of the law. Failing to select a structure for a business carefully can mean the loss of that business and of its associated assets. I will discuss various types of business entities that exist and the pros and cons of each. Specifically, I will explore

• Sole Proprietorships

• General Partnerships

• Limited Partnerships

• Corporations

• Limited Liability Corporations

I will also discuss following business situation:

• Joe's Lawn Care and Landscape Equipment Rental

I will determine whether the business is effective in operation, as business currently exists, or if there is a need to make changes to the business entity.

Sole Proprietorship is one individual or married couple in business. Sole proprietorships are the most common form of business structure. This type of business is simple to form and operate and may enjoy greater flexibility of management, less legal regulation, and fewer taxes. Although this is the easiest form of business to start, "the income and losses are treated as personal and will be filed on a Schedule C along with the regular Form 1040 tax return" (IRS, 2004). If profits are minimal, the owner will be paying less in income taxes with this form of business than with a corporation. However, the business owner is personally liable for all debts incurred by the business. Sole proprietorships cannot take advantage of special business income tax rates since all income is considered individual income. In addition, sole proprietors are not protected from personal liability if they get into trouble with a client. If an upset client decides to sue, they sue the proprietor personally. If the proprietor must declare his company bankrupt, he files for bankruptcy personally. Moreover, by definition, a sole proprietorship can have only one owner, and that owner must be a "natural person" (i.e., not a corporation, trust, LLC, or other such entity.) Finally, one cannot sell or inherit a sole proprietorship.

A General Partnership is composed of two or more persons (usually not a married couple) who agree to contribute money, labor, and/or skill to a business. Each partner shares the profits, losses and management of the business and each partner is personally and equally liable for debts of the partnership. In terms of asset protection, general partnerships can be even worse than sole proprietorships.