University of Phoenix
January 12, 2015
When starting and owning a business, you need to understand the importance choosing the legal structure of your organization; the different types of business structures are Sole Proprietorship, Partnership and Corporation. The following paragraphs will provide an explanation of each and the advantages and disadvantage of each business configuration.
Personal Business Structures
Sole proprietorships are the simplest of all legal structures they lack many of the legal and financial protections of other businesses. The advantages are that owners pay only one tax at a personal tax rated, the set-up cost is very inexpensive with minimum fees, and an owner has complete authority on when to transfer or sell the business (University of Phoenix, 2011). One disadvantage is that you are personally liable for debts and other liabilities. Another is that it is difficult to convince investors to provide funds.
There are two different types of partnerships, General Partnership and Limited Partnership.
A General Partnership is a written agreement between two or more people. Each partner contributes a percentage of money, property, labor, or special skills and each partner shares in the profits and losses of the business. The advantages are that it has fewer regulations and are under less government supervision than corporations, they are taxed like a sole proprietorship (Griffin, 2015). Each partner has to include his/her business income on their personal tax return, which is taxed at a personal income tax rate and they can take allowable personal deduction for business losses on their individual return as well (Griffin, 2015). The disadvantages however are, a General Partnership is limited to the number of owners and the owners personal obligation for all obligations and debt. (Bizfilings)
A Limited Partnership has one or more limited partners. It is a partnership in which only one partner is required to be a general partner. It is recommended to obtain legal counsel and to record all roles and responsibilities of each partner so everyone knows their role and what their boundaries are (University of Phoenix, 2011). The advantages of Limited Partnership are to protect the acting partners from personal liability for both personal and business tax. Both partners share in the profit or loss and there is no corporate tax. There is less paper work to start a limited partnership. The disadvantages however, if the business suffers a loss both partners are legally responsible for that loss prior the sale of your shares. Each partner is liable for the actions of other business partner. If one of partners dies the company automatically dissolves.
Corporate Business Structure
There are three different types of corporate structure; General Corporation, Subchapter ‘S’ Corporation, and Limited Liability Corporation (LLC). General Corporation is very common. It creates separate legal entity, owned by stockholders, unlimited number of stockholders, and stockholders are protected from business creditors. The advantage to being part of a General Corporation is the owners personal assets are protected from any business debt and liability (University of Phoenix, 2011). There are tax free benefits for expenses such as travel, insurance and retirement plan deductions, change in ownership does not affect management and it is much easier to raise capital through the sale of stocks and bonds. . The disadvantage is that it can be very expensive and it is important that you hire a lawyer (University of Phoenix, 2011).
The second type is a Subchapter ‘S’ Corporation. S Corporations are corporations with a special tax designation from the IRS for corporations that have already been formed. ‘S’ Corporations behave much like a General Corporation but receives other advantages from the IRS and it is generally used by small