April 15th, 2012
Business Organization Comparison
When choosing to start a business, there are different forms of organization one must consider. There are sole proprietorships, partnerships, C corporations and S corporations. Each of these forms of business organization has its advantages and disadvantages, its own requirements with regards to financial statements, tax implications, legal implications and accounting implications. Each of these forms of business organization will suit each product, service and “entrepreneur” differently, some to their benefit, and some to their detriment. Choosing the correct form of organization is vital to the success of the business, or a contributing force to the failure thereof, so one must ensure that the correct form of organization is selected for the business which is to be created.
The sole proprietorship is probably the most basic form of business creation, as it is in essence one person doing business as a separate entity. This type of company may have many employees, the sole proprietors the only manager of the business, the only source of funding for the business, and the only owner of the business. While this may seem as though it is a fail-proof way to get your business off the ground, it is also the form of business organization which exposes the lone owner of the business to severe personal risk. The owner holds unlimited personal liability for all of the obligations of the business, which means that the owner's personal assets can be at stake should lawsuits ever be filed against the sole proprietorship. To further shall have a sole proprietorship has very little distance from the sole proprietor themselves, the sole proprietorship is not even taxed, as the sole proprietor is taxed on the profits of the sole proprietorship as though they were his/her own personal income. A sole proprietorship is a very easy form of business to create, and in most jurisdictions it only requires one to file a DBA, or a “Doing Business As” form. What this form states is that John Doe will be conducting business under the name “JD Carpentry,” and all transactions, profits or losses, or legal ramifications can be traced back to John Doe. In several US states DBA’s are officially referred to using other terms; some states use ”Assumed Business Names”, and some other states call them “Fictitious Business Names.” No matter how you slice it, or what you call it, a sole proprietorship is one person assuming the name of the business, and performing transactions under that business name. Although sole proprietorship is a very easy form of business to create, sometimes the ease is not worth the risk.
A partnership is a form of business in which two or more entities, come together to share in the majority of the risk which is sole proprietor would undertake in a sole proprietorship, but in this case is split amongst both of the partners. As with a sole proprietorship, a partnership is not taxed, as the profits of the organization are considered to be the partners’ income, and are taxed at the personal level. In the majority of partnerships both partners have equal management rights, perform the majority of tasks in the business together, and contribute funding equally to the partnership. There are some cases in which one person is considered a silent partner, providing only the funding for the business, and the other partners there for the day-to-day operations. The only documentation required to start a partnership would be the filing of a general partnership agreement, along with other findings which fall and play should real estate be involved. As with a sole proprietorship, although the risk is split amongst the partners, all of the partners can be held personally liable for anything involving the business. While not as risky as a sole proprietorship, a partnership holds risk as well.