If I were to start my own business, I would choose sole proprietorship as the best business structure for a start. Its advantages are ease of organization and low organizational costs. It is the most convenient structure for a small business in terms of taxation and less risky than a partnership. Another convenience is complete independence, flexibility, freedom, and efficiency of action (this type of business provides the owner with maximum freedom of action).
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Sole proprietorship refers to a business owned by one person or household. This structure has one significant advantage: all the assets and liabilities of such an enterprise are both personal assets and the owner’s liabilities. The sole owner bears unlimited liability for the enterprise’s debts and its other obligations: if the enterprise is not able to pay its debts, then any property of the owner can be seized. A feature of sole ownership is the flexibility of taxation. All proceeds and all expenses are the property and responsibility of the business owner. With this form of organization, the owner pays only self-employment tax if the revenue is more than $ 400 per tax year (MacKenzie & Smart, 2020). Thus, in general, the owner must pay estimated tax: income tax plus self-employment tax.
A partnership is an enterprise owned by two or more people called partners who jointly own its capital. Partnership agreements usually stipulate how business management decisions should be made and how the business’s profits and losses will be allocated. Unless otherwise specified in the partnership agreement, the partners bear unlimited liability for the enterprise’s obligations. The advantages of such a structure are about the same as with sole ownership – there is no unnecessary routine with documentation for setting up a business; however, from an asset protection perspective, partnerships are an extremely risky way of doing business (Spadaccini, 2007). Not only can the lenders of the business gain access to your personal assets, but the owner is personally responsible for the actions of their partners.
If a future entrepreneur is aimed at a serious big business with the prospect of development and with the attraction of investment funds, then an LLC should be their choice. A limited liability company is founded by one or more persons, the authorized capital of which is divided into shares of the sizes determined by the constituent documents. It owns a separate property, recorded on its independent balance sheet, can, on its own behalf, acquire and exercise property and personal non-property rights, bear obligations, be a plaintiff and defendant in court (Mancuso, 2020). Thus, it is endowed with civil legal capacity and acts as an independent participant in civil turnover.
The corporation is a widespread and versatile form of business. The company issues shares, and each of the co-owners (shareholders) receives a percentage of the total number of issued shares corresponding to the share that this shareholder contributed to the company’s total capital. The corporation’s highest governing body is the meeting of shareholders, at which decisions are made that are approved by a majority of shareholders’ votes. Shareholders make decisions on the distribution of profits, changes in the enterprise’s organizational and legal form, and elect a board of directors, which, in turn, appoints managers to manage the affairs of the corporation.
The advantage of a corporate organization is that shares can be transferred from one owner to another without disrupting the enterprise’s regular operation. Besides, shareholders have limited liability for the corporation’s obligations. The advantage of such a business structure is the ability to generate capital, raise funds through the sale of a share, and limited liability (Mancuso, 2020). When it comes to taking responsibility for business debts and corporate actions, shareholders’ assets are protected. Also, corporation owners pay only taxes on corporate profits paid to them in the form of wages, bonuses, and dividends, while any additional profits are provided by the corporate tax rate, which is usually lower than the personal income tax rate (Mancuso, 2020). The downside is the fact that this type of business is costly and time-consuming to run. In addition, corporations are subject to double taxation (when the company makes a profit and when dividends are paid to shareholders). There are two types of corporations: C-corporations and S-corporations. The first differs from the second in that it pays taxes separately from the owners.
In the US, companies’ main taxes include corporate income tax, sales tax, real estate tax, capital gains tax. Different types of companies pay different types of taxes and are also eligible for different deductions and benefits. C-companies pay taxes on all profits. Typically, the tax is levied on the money that the business uses to cover costs or losses. And also from the profit, which is distributed among the owners as dividends. This happens before tax is paid since each shareholder’s dividend income is separately taxed at the personal income tax rate.
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Partnerships, sole proprietors, S-corporations, and LLCs, do not pay taxes on business profits since they are not separate taxation objects. Instead, the organizations “transfer” the profits to the owners, who, in turn, report the income or losses of the business on their personal tax returns. In LLCs and S-companies, income tax is paid by the shareholders of the enterprise themselves. After the adoption of the law on the reduction of taxes and jobs, a new income tax deduction was established for such organizations (McKenzie & Smart, 2019). Now, until 2025, owners of partnerships, limited liability companies, and S-corporations have the opportunity to deduct up to 20% of the company’s net profit for income tax.
Mancuso, A. (2020). LLC Or Corporation?: Choose the Right Form for Your Business. Nolo.
McKenzie, K. J., Smart, M. (2019). Tax Policy Next to the Elephant: Business Tax Reform in the Wake of the US Tax Cuts and Jobs Act. CD Howe Institute Commentary, 537-546.
Spadaccini, M. (2007). Business Structures: Forming a Corporation, LLC, Partnership, Or Sole Proprietorship. Entrepreneur Press.