Making Words Work

Posts tagged ‘Sole proprietorship’

Business Entities: Corporations

This is the last of our four-part series on Business Entities.

Today, we will cover Corporations.

  

Corporations

A corporation is a body –it is a legal person in the eyes of the law.  Which means it can bring lawsuits, buy and sell property, contract, be taxed, and even commit crimes.  The most notable feature of a corporation: a corporation protects its owners from personal liability for corporate debts and obligations –within limits.

Of all the entities, corporations are the most formal.  The shareholders, director’s, officer’s, and managers must observe particular formalities in operating and administering the corporation.  For example, decisions regarding a corporation’s management must often be made by formal vote and must be recorded in the corporate minutes.  Meetings of shareholders and director’s must be properly noticed and must meet quorum requirements.  Corporations must meet annual reporting requirements in their state of incorporation and in states where they do significant business.

Advantages of the Corporation

  • Owners are protected from personal liability for company debts and obligations
  • Corporations have a reliable body of legal precedent to guide owners and managers
  • A corporation is the best vehicle for eventually public companies
  • Corporations can more easily raise capital through the sale of securities
  • Corporations can easily transfer ownership through the transfer of securities
  • A corporation can have an unlimited life
  • Corporations can create tax benefits under certain circumstances, but note that C corporations may be subject to “double taxation” of profits

 

Disadvantages of the Corporation

  • Corporations require annual meetings and require owners and director’s to observe certain formalities
  • Corporations are more expensive to set up than partnerships and sole proprietorships
  • Corporations require periodic filings with the state and annual fees

 

 This concludes our Business Entities series of  posts.  I hope this has been helpful to you.  If you feel your business is the incorrect entity, see your CPA and or attorney immediately.

Advertisements

Business Entity: Partnerships

 This is the second part of a four-part blog series

Partnerships

Partnerships are formed when two or more people carry on as co-owners of a business for profit.  Partnerships are often formed with nothing more than a hand-shake.  However, responsible partners will seek to have their partnership arrangement memorialized in a partnership agreement with an attorney.

How Partnerships are Managed

The partner that has the majority of the percentage of the business generally rules.  The other partners go along with the majority owner.  Partnerships do not require formal meetings of their partners like corporations do.  Overall, the management and administrative operation of partnership is relatively simple.  Like sole proprietorships, partnerships often grow and graduate to LLC or corporate status.

Varieties of Partnerships

There are several varieties of partnerships and they range from the general partnership to the limited liability partnership.

The General Partnership

The standard partnership, by default, is call the general partnership.  General partnerships are the simplest of all partnerships.  In a general partnership, all partners share in the management of the entity and share in the entity’s profits.  Matters of running the business are decided by the majority of the partners. All partner’s are responsible for the liabilities of the general partnership.

The Limited Partnership

The limited partnership is more complex than the general partnership.  The limited partnership is owned by two classes of partner; general partners manage the enterprise and are personally liable for its debts: limited partners contribute capital and share in the profits but normally do no participate in the management of the enterprise.

Limited partnerships seem to be on the edge of extinction because of the limited liability company.  Both the Limited partnership and the limited liability company share partnership-style taxation and partnership-style management but the LLC offers greater liability protection because it extends liability protection to all of its managers. 

The Limited Liability Partnership

Another form of partnership is the limited liability partnership.  A limited liability partnership is one composed of licensed professionals, such as attorneys, accountants, or architects.  The partners in the LLP may enjoy personal liability protection for the acts of other partners, but each partner remains liable for his or her own actions.  State laws generally require a LLP to maintain generous insurance policies or cash reserves to pay claims brought against the LLP.

As you can imagine, the complexity of this form of partnership is full of legalities and are best covered by a qualified attorney.

Advantages of the Partnership

  • Owners can start partnerships relatively easily and inexpensively
  • Partnerships do not require annual meetings and require few ongoing formalities
  • Partnerships offer favorable taxation for smaller businesses
  • Partnerships often do not have to pay minimum taxes that are required of LLC’s and corporations

 Disadvantages of the Partnership

  • All owners are subject to unlimited personal liability for the debts, losses, and liabilities of the business (except in the cases of limited partnerships and limited liability partnerships)
  • Individual partners bear responsibility for the actions of other partners
  • Poorly organized partnerships and oral partnerships can lead to disputes among owners

 Note:  An S-Corp is considered a corporation with different tax liabilities

 

Next up:  Limited Liability Company (LLC)

How to Choose the Right Entity for Your New Business

Which entity is right for you?

Part One of a four-part series of posts

When starting a business, the first thing should be to decide what entity it will be. Most business owners don’t think about this until their CPA asks, “What entity is your business?” As a tax-preparer, I have seen the blank stare many times from clients that didn’t completely understand what they were getting into when they started their business.

Hopefully, this information will help.

The right entity for your business will depend on your business goals. You will need to answer questions and think of where you want to take your business in the future before you can answer most of them. Here is an easy to understand lesson in what each option means and a helpful chart (included in the 4th post) to help you choose wisely.

Let’s get started.

The entity that is heard about most often is a sole proprietorship.

A sole proprietorship is indivisible from its owner. It can operate under a trade name. No formal papers have to be filed; the status arises automatically from buying or selling goods.  A sole proprietorship is just a fictitious name or a “doing business as” clause. The real name is you. For instance: John Barr has a plumbing business. John Barr is the real name and the fictitious name is the company he operates, John’s Plumbing. Both John Barr and John’s Plumbing are one in the same.

Taxes for the Sole Proprietor

Because a sole proprietorship is indistinguishable from its owner, sole proprietorship taxation is quite simple. The income earned by a sole proprietorship is income earned by its owner. A sole proprietor reports the sole proprietorship income and/or losses and expenses by filling out a Schedule C along with the standard Form 1040.

A sole proprietor need not pay unemployment tax on themselves, although they must pay unemployment tax on any employees of the business. That means that if the business fails, the sole proprietor does not get unemployment.

Legalities

Sole proprietor’s are personally liable for all the debts of their business. The potential liability can be alarming. For example: Let’s assume the sole proprietor borrow money to operate, but the business loses its major customer, goes out of business, and is unable to repay the loan. The sole proprietor is liable for the amount of the loan, which can potentially consume all their personal assets. In other words, you have no protection since the real name of the company is yours. In order to repay the loan you may have to sell everything else you have to come up with the money. You have no protection against your personal assets. They can all go away.

Advantages of the Sole Proprietorship

○ Owners can establish a sole proprietorship easily and inexpensively.
○ Sole proprietorships carry little formalities
○ Sole proprietors don’t have to pay unemployment tax on themselves
○ Owners may freely mix business and personal assets

Disadvantages of the Sole Proprietorship

○ Owners are subject to unlimited personal liability for loses, debts, and liabilities of the business
○ Owners cannot raise capital by selling an interest in the business
○ Sole proprietorships rarely survive the death or incapacity of their owners and so do not retain value

When choosing an entity, it is important to make a choice based on facts but also to think about the future and do the “what ifs” for you and your family.

Next up: Partnerships

%d bloggers like this: