Sole Proprietorship
Steps to Form
The proprietor decides on the product or service to render and selects a unique name for their business. There are no legal formalities required during the establishment of the enterprise. However, the proprietor is required to obtain the prerequisite business licenses, depending on the location (Cooper et al., 2016). The institution of a sole proprietorship materializes when the owner starts running their business and is maintained by continuous trading.
Personal Liability for Owners and Taxation
The personal liability of the proprietor in this entity is unlimited. This implies that if the company fails to meet its legal obligations or debts, the business owner must settle them. The proprietor’s tax registration particulars are utilized for the enterprise’s taxation purposes. Thus, the business owner declares their involvement in other business activities to the internal revenue service (IRS) for effecting the value-added tax (VAT) as part of tax obligations.
Advantages and Disadvantages
The main advantage is that the owner enjoys full business control, hence a quick decision-making process. Further, the entity enjoys business confidentiality as the law does not compel them to prepare any documents or financial accounts for the public. However, it has the shortcomings of having limited managerial capacity, constrained access to capital, unlimited proprietor’s personal liability, and the life cycle is pegged on its owner.
Partnership
Steps to Form
The parties select their preferred partnership business name, ascertain its availability, and submit it to the local or federal authorities for registration. It gets incorporated upon fulfilling the predetermined legal threshold and fees. The partners then discuss and execute a formal partnership deed. The parties finally obtain the requisite local licenses and register for tax obligations with the revenue section ready to start the business.
Personal Liability for Owners and Taxation
In an ordinary general partnership, the partners are jointly answerable for the entire acts or omissions in the business (partners have unlimited liability). A limited liability partnership only meets the liabilities covered by partnership assets. For taxation purposes, the total taxable income is shared as per the partners’ capital contribution (Burns, 2016). Every partner then distributes the share of their funds to settle the trading taxes during their routine filing of income tax returns.
Advantages and Disadvantages
Partners enjoy enhanced decision-making, mutual support, more capital, and access to better skills, knowledge, and contacts compared to the sole proprietorship. Unlike the limited liability company, there is more privacy, easy establishment, and fewer legal requirements in partnership business. However, the enterprise faces demerits such as unlimited liability, and the entity lacks independent legal prestige (Burns, 2016). Moreover, the profits are shared and may cause business disputes and disagreements.
Limited Liability Company
Steps to Form
The members of the limited liability company (LLC) identify a unique name. The articles and memoranda of the association are then prepared and filed with the registering body. The documents contain clauses that stipulate the LLC’s name, business purpose statement, and member’s obligations, powers, liabilities, rights, duties, names, and addresses (Mancuso, 2020). Paperwork, incorporation, and relevant fees are paid to the state for registration and employer identification number generation.
Personal Liability for Owners and Taxation
The LLC is entirely responsible for accountabilities and arrears not limited to the sum unpaid by the LLC, actions or omissions of LLC co-owners or staff engaged by the company. LLCs pass the profits directly to the financiers who incorporate the trading gains as part of their income and file the tax returns with the IRS. However, every LLC should furnish the IRS with an informational return to ensure accurate reporting by members.
Advantages and Disadvantages
A predominant benefit of LLCs is that they are simple to form and offer protection against business liabilities to some extent, compared to partnership engagements. Unlike a corporation that operates in perpetuity, an LCC faces shortcomings as it may be dissolved when a member dies or is declared bankrupt, contingent on state regulations. Thus, they are not suited for companies established for public trading.
Corporation
Steps to Form
The owners decide on the business name, confirm availability and register as a DBA (Doing Business As). After that, the proprietors appoint the directors and file the articles of incorporation with the state’s secretary. After drafting the corporate bylaws and shareholders’ agreement, the board of directors convenes for the initial meeting and issue stock. Finally, business permits and licenses are obtained, registered with IRS, and a corporate bank account opened.
Personal Liability for Owners and Taxation
A corporation runs independently, and the stockholders are not responsible for the accrued debts or other members’ actions. The stakeholder’s business liability only extends to the invested resources in the firm. The entities remit their income taxes to the IRS from the earned profits. The stockholders are unaccountable for filing taxes on gains received by the corporation, thus, are exempt from self-employment taxes by the government.
Advantages and Disadvantages
Corporations offer personal liability protection to their members, straightforward transfer of ownership, security, and business perpetuity. The entity also enjoys better access and capital raising, and the shareholders benefit from self-employment tax exemption (Mancuso, 2020). Nevertheless, establishing a corporation is time-consuming due to the rigid protocols, formalities, and lengthy application process. The entities are also expensive to form and run and often face double taxation challenges.
Summary
The paper has discussed the various types of business entities: sole proprietorship, partnership, limited liability company (LLC), and corporations. From the discourse, if I were to start my own business enterprise, I would go for the sole proprietorship. This is because it is easy to establish as it does not need incorporation. Additionally, I will have full control over the ownership and management of the entity.
References
Burns, P. (2016). Entrepreneurship and small business (4th Ed.). Palgrave Macmillan Limited.
Cooper, M., McClelland, J., Pearce, J., Prisinzano, R., Sullivan, J., & Yagan, D. et al. (2016). Business in the United States: Who owns it, and how much tax do they pay? Tax Policy and the Economy, 30(1), 91-128.
Mancuso, A. (2020). LLC or Corporation (9th Ed.). The NOLO Trademark.