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reflection about sole proprietorship, partnership, corporation
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Corporate Characteristics Proposal
Financial Accounting II
Corporate Characteristics Proposal
Introduction here
Various Forms of Business Organizations
Before starting a new business, several decisions such as its legal structure must be made first. Five basic entity types exist in which to structure a business. These types consist of sole proprietorships, partnerships, limited liability companies (LLC), C corporations, and S corporations. When determining the type of structure to use, comparison of different factors such as liability to the owners, taxation, and management controls must be conducted.
Sole Proprietorships
The sole proprietorship has one owner that is completely liable for the actions of the company but has total control over all decisions. The profit or loss of the business is reported and taxed on the owner’s individual tax return.
Partnerships
A partnership has two or more owners who share control and management decisions of the company. Profit or loss is split between the owners based on a predetermined percentage rate, usually determined by investment or activity in the company and reported on each individual’s income tax report.
Limited Liability Companies (LLC)
A limited liability company combines the attributes of a partnership with the limits on liability of a corporation. The profits and losses of the company still pass to the owners as in a partnership, but the losses can only offset other income up to the amount the individual invested. Formal action is not required to form a LLC, but articles of organization are filed with the proper state department. Management is still controlled by the owners.
C Corporation
A C corporation is the basic form of corporation in the United States. The amount of shares of stock a C corporation can issue is unlimited and traded freely. The C corporation files its own tax return instead of showing profit and loss on the owner’s personal returns. The dividends issued to the stockholders are however, subject to individual taxes also, causing a double taxation effect. In addition, the C Corporation pays employment taxes on active shareholders salaries by differentiating between passive and active income.
S Corporation
The S corporation is limited to the amount of shares of stock it can issue to 100 United States shareholders.
Liability: Investors have limited liability. This protects investors from having litigation brought against them. If the investor is a managing partner, however they then could have their personal assets and property employed to satisfy any debt the S Corp has accrued.
Liability – The general partners are all responsible for the debts and obligations of the business, but the limited partners are only liable up to their invested amount.
Partnership – “A legal entity formed by two or more co-owners to operate a business for profit.” (Longenecker, Petty, Palich, Hoy, Pg. 202) In a partnership, the advantage for the owners is the capability to reduce the workload and the financial burden, especially if each partner has management skills that enhances the business. The disadvantages of a partnership such as personal conflicts and leadership expectations, therefore this organizational form should only be chosen once all other options have been considered.
Capital is a major factor for decision making. Since the business involves a group then the three forms of business exposes the group to a greater capital availability. The liability of members is also an important factor. The partnership offers unlimited liability to the members of the partnership while the corporation and Limited Liability Company allows the members limited liability and thus their personal assets cannot be interfered with in the event of a liability. The decision making process is for the business associations but the input of all members results to the making of good and informed decisions. Finally, the taxation practices for various forms of associations informs the decision. Corporations are often taxed twice whereas the LLC and partnership business is taxed
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.
Corporations create two kinds of securities: bonds, representing debt, and stocks, representing ownership or equity interest in their operations. (In Great Britain, the term stock ordinarily refers to a loan, whereas the equity segment is called
One awesome advantage that comes with an LLC, other than the protection from legal liabilities like stated above, is the ease of getting it. They also take much less paperwork and effort to get started so they are fairly cheap. Another nice plus that comes with an LLC is that you have fewer restrictions on how you can divvy out your money(profit sharing). In my opinion corporations actually have two of the best advantages out of all the available options. Being a corporation allows you to sell stock, so you
Existing as an LLC, the company could maintain perpetual existence. An LLC can still be dissolved upon death, withdrawal, resignation, or bankruptcy of a member, unless you have provided for these situations in either a written operating agreement between the members or the articles of organization.
A sole trader is a one man business. There is just one manager. Although they are the sole manager and owner they can employ staff to work for them. They can employ as many as they want to work for them. A sole trader is self employed, this means they work for themselves, they employed themselves, they for nobody. Sole traders trade with others. They may trade expertise, an example of this would be a business consultant taking on a big job and needing an extra hand just for that job, so this person may employ a person with the expertise he/she needs. Because a sole trader is the sole owner he/she keeps all the profits, unless he/she has any employees. The owner of the business makes all the decisions, he/she will not have anyone telling them what to do. When one wants to set up a sole trader business it is relatively easy. There is little paper work involved bec...
A limited partnership is a form of business that ensures that an investor has limited personal liability, and further enhances the ability to raise capital for the growth of the business. As compared to sole proprietorship that has the business owner bearing the entire liability, a limited partnership provides that the partner only bears a portion of the liability. This form of business offers personal asset protection, basically implying that a partner cannot have his/her assets being used to settle the business liabilities and debts, further contrasting a general partnership in which the partners are not considered as separate entities from the business, and their personal assets can be used in the settlement of debts and liabilities.
A sole proprietorship is a business entity formed by an individual, and are the most common and simple form of business structure. The owner is responsible for all of the control, liability, and management of the business. Although the business owner gets all the profits from the business, they are personally liable for all debts incurred by the business. Because the sole proprietorship is merely an extension of its owner, it has no life apart from its owner. It is not a legal entity; therefore, it cannot sue or be sued. Creditors must sue the owner and vice versa. There are no formalities necessary when creating a sole proprietorship. By simply not choosing another business form or structure, the person going into business by himself automatically creates a sole proprietorship by default. The business name simply needs to be registered with the state.
There are two types of limited companies: Private and public. Shareholders own private limited companies. Members of the public cannot buy the shares and the shareholders cannot buy or sell their shares without agreement from the other shareholders. Family owned businesses or larger businesses such as Virgin would fit into this category. Public limited companies have shares on the stock market and can be bought and sold by any member of the public, this way the company can raise further capital and expand their resources. Tesco and British Telecom are such examples. Both these types of limited companies have limited liability, which means the owners of the business are only liable for the amount they invested in the business (unless the debt is so large that the business has to be sold to repay the debt).
Before a partnership formation is imminent, the business needs to decide on which type of partnership to form. There are three types of partnerships: (1) general partnerships, (2) limited partnerships, and (3) joint ventures. All three partnerships contain two or more owners, but all partners assume equal division of ownership, liabilities, and profits in a general partnership. Limited partnerships offer limited liability protection based on each partner’s contribution percentage. Joint ventures are classified as general partnerships with limited existence periods. Once a type of partnership has been determined, the business fulfills a series of requirements before the partnership can be successfully formed. The first step is to register
Limited Liability – The obvious advantage of a Limited Liability Company is the financial security that comes with the business. The Company’s shareholders will only be liable for any debt the company accrues according to the levels of their own investment and no more. This can provide a comfortable feeling of security for investors in the Company.
4. Control: the members of the LLC have the ability to set up control of the corporation as they see fit.