Business Forms of Organization

Apex Training Company A sole proprietorship is a business that has no separate legal entity from the owner. This structure made sense initially when the business was just Martha, working by herself. Whatever income that the business earned was income that she earned, so it flowed through directly to her. More important, the expenses associated with the business also flowed through. The result was probably some tax savings, because at that point the business was not making money, and Martha would not have paid income taxes.

Today, there should be concerns about running the business as a sole proprietorship. First, in most jurisdictions the corporate tax rate is lower than the personal one. At $4.2 million in revenue, there may be profit that is fairly significant. As the business grows, Martha will pay significantly more taxes on the company's income at the personal rate than if it was taxed at the business rate. But there are other concerns as well with the sole proprietorship at this point.

One is that it is much more difficult to capitalize the business. The sole proprietorship structure simply does not allow for that. The second thing is that there is increased risk associated with a sole proprietorship. A corporate training company might not have much legal risk, but if Martha were to face legal action, her personal assets could be at risk. If the business is incorporated, then the business would be at risk but her personal assets would not. The downside risk to Martha can therefore be limited by incorporation.

Furthermore, if Martha starts hiring people, then the business does not even fit the definition of a sole proprietorship, so at this point it seems reasonable that the business has outgrown this structure anyway, regardless of the downside risks inherent in it. 3. If Apex is structured as a partnership, Martha needs a partner. This does not appear to be the case. Furthermore, a partnership still has downside risk, something that Martha at this point should be trying to avoid.

Additionally, business income still flows through to her for taxation, so again this is another issue that a partnership does not address. An LLC is a corporate structure that limits the downside risk to the owner of the business. This is beneficial to Martha, but there are some drawbacks to the LLC structure as well. The biggest one is taxation. The LLC form is not recognized by the IRS, which means that the business still has to take either a sole proprietorship, partnership or corporate form.

An LLC would limit Martha's downside legal risk, but she would still be a sole proprietorship for taxation purposes. The LLC still has flow-through taxation, so it really only solves one of Martha's problems. Therefore, the LLC by itself still exposes Martha to the higher personal taxation rate (Investopedia, 2016). 4. It is possible for a sole proprietorship to have employees. The sole proprietor is an employer, just like a wealthy person might hire a cook or butler, so too can a sole proprietor hire people to perform various tasks (Burney, 2016).

The sole proprietor is still responsible for filling out tax forms for the employees and handling them as they would any other employee hired by any other business. if the business grows big enough - over 15 employees -- it will still be subject to.