Business in every form, entity, size, capacity and level is what keeps our society thriving.
Every business has its own needs, capabilities, strong points and weak points.
In this blog I will attempt to define and differentiate the legal entities in our society
which businesses can be formed under. I will specify the advantages and disadvantages in
real world scenarios to enable the reader a vivid understanding of each entity in detail.
This blog should give the reader insight into the structure of business from the legal
Stand point to how it is formed and operated in our society. In conclusion to this paper,
the reader will know the differences between a sole proprietorship, general partnership,
limited partnership and corporation.
Every legal business entity has its advantages and disadvantages. There are four different
entities that one may form or organize their business under. A sole proprietorship is a
business with one sole owner or individual. There are not many advantages to a sole
proprietorship. The basic benefits would include the simplicity of filing taxes where only
a self employment form is required. There are also no registration requirements or fees
associated with a sole proprietorship. A disadvantage to this entity is the personal liability
to all debts. Your personal credit and assets are not protected under this form of business
and can result to garnishment, property seizure and a negative credit report due to
excessive and outstanding debt. A sole proprietorship has the most benefits when
it comes to taxes. A sole proprietor doesn’t pay payroll or payroll taxes. They can also
save on income taxes and keep their profits. Health care can also be extended to the
spouse of the sole proprietor and then deducted as a reimbursement. This is a significant
long term tax savings. Many people start businesses as sole proprietors to avoid the
expenses of forming a partnership or corporation.
There are two types of partnerships, general and limited partnerships. In a general
partnership all partners will have unlimited liability for all debts incurred, whereas in a
limited partnership all partners have the same unlimited liability for all debts but it is
limited to the contribution or investment each partner has made. In a general partnership
all partners would report their profits, losses, expenses and investment on his/her personal
tax return. There is no registration with the state, written agreement or contract
requirement though it would be in every partner’s best interests to have one. The death of
a partner terminates the partnership. General partnerships are taxed in the same manner as
sole proprietorships. With minor differences in tax filing, a limited partnership operates
the same as a general partnership in regards to taxes. A limited partner is one who
invests or contributes to the business and isn’t involved in running the business. A
limited partnership has to have one or more partners who runs the business and is liable
for partner’s debts. One partner can be both the limited partner and general partner but
there must always be 2 or more partners in a limited partnership. A limited partnership
has to file with the state. One of the advantages of a limited partnership is that it is easier
to attract investors with this type of entity. A limited partner can leave the partnership at
anytime without compromising the business. Overall, a limited partnership has more state
requirements and fees than a general partnership and general partners assume all personal
liability. In a general partnership, each partner may have different visions, goals and
directions they may want to take the company or there may be a significant and unequal
investment in time, finances and labor. All partners in a general partnership will be liable
for each partners actions which can be a huge disadvantage in comparison to a limited
partnership. The advantage is that you can combine expertise, finances and resources
with small start up costs and get business rolling quickly. General partnerships usually
work when each partner shares or equally contributes time, labor and financial
commitment. Each partner should bring a different expertise strength and skill in order
for a general partnership to thrive.
The last entity is the corporation. A corporation to me is the business with the umbrella.
A corporation may act, conduct business, enter contracts and agreements like a real living
person but is protected beyond personal debts and assets with far more tax breaks and
options than an individual entity or partnership depending upon the state the business was
incorporated in. Personal credit and assets are not at stake in debt reconciliation or
satisfaction. This is what I mean by the “umbrella”. Corporations only pay taxes on
profits, salaries and bonuses. Corporations may offer stock options to its investors. An
owner can also take salaries, bonuses and dividends as an employee of his/her own
corporation. Multiple owners of a corporation are called shareholders. Shareholders are
not involved in operations of the corporation. Unless there is a buy-sell agreement clause
a shareholder may buy, sell or transfer as many shares he/she may wish at any giving
time. The only disadvantages that come to mind are the fees that it costs to get a
corporation started. Also an extensive form of organization has to be conducted as far as
paperwork is concerned. The corporation must file all taxes at the appropriate times.
Assets and corporate bank accounts must be kept totally separate from personal bank
accounts to avoid any type of income, profit or wage confusion or IRS audit. All licenses
must be maintained and every meeting, corporate action, expense, donations and/or
sponsorships should be well documented and able to be furnished at any time if required
to. The option to incorporate your business should be for the more serious business
minded people who seek asset protection under a corporate umbrella who intend on doing
big business and registering with the Secretary of State.
This is the ideal option for anyone doing business in this society.
