Business Entities
There are four different types of business entities that you can choose for your company. Some of the factors to take into consideration are liability, taxation and ownership structure. The different major business structures will each have their advantages and disadvantages, depending on the needs of your business. Understanding the differences between the different business structures is essential to aligning the structure with your business needs.
The most basic form of business is the sole proprietorship. The sole proprietor is the owner and operator of the business. There are minimal legal requirements to start a sole proprietorship – just the basic licenses to operate a business. For legal and taxation purposes, there is no distinction between the proprietor and the business. The proprietor has full legal liability, and pays taxes as an individual on income earned, at personal tax rates. Further, the business assets are equal to the personal assets – legal action taken against the individual can be paid out of business assets, as there is no legal distinction between personal and business assets. From a structure point of view, the sole proprietorship’s simple structure allows for complete freedom
The second business entity is partnership. A partnership is when two or more individuals form an agreement to run a business together. Partnership is a fairly simple and easy to create with a partnership agreement. The partnership agreement sets out the ownership structure of the partnership, so as long as the parties agree the business can be started. However it has its own set of liability issues when it comes to running a company with multiple owners. The partners negotiate among themselves the division of capital and labor.
Liability is share among the partners, according to their ownership, and personal assets can be at risk in a partnership. Further, taxation in a partnership is flow through, meaning that each partner pays taxes on their partnership income, at the personal rate.
Another business entity is the corporation....
The corporation costs a little more than partnerships and sole proprietorships to set up. The corporate structure requires a bit more work, with lawyers to draw up contracts, but is generally manageable. There are specific benefits to the corporation structure. First, there is limited liability for the owners. The owners are not liable for things the corporation does in the course of its activities or that employees do in performance of their duties with the corporation, and this is because the corporation is a distinct legal entity.
Corporations are also taxed independently, at corporate tax rates. The owners of the composition are not taxed on the corporation’s income, just the income that the corporation pays them. There are a few other key differences, for example that a corporation has the ability to raise capital from outside, which partnerships and sole proprietorships cannot do. So this more open-ended ownership structure provides a bit more flexibility for structure, management and ownership.
In a corporation the owners have limited liability because the corporation has a separate legal standing. In this one the owners are protected from legal action if the business is being sued because the business will be sued by its name not the stock holder name. But in a corporation they are held responsible for their actions in a different way, where maybe under criminal law an individual can be prosecuted such as under Sarbanes-Oxley but in general. One example is that the government look over the operations of a business and requires them to have a board of director that holds meetings. In a corporation income is also subject to taxation on both personal and business revenue. A corporation is separate legal entity that it is set apart from its owners which means in case of a stock holders death or divorce or any legal problems will not affect the life of the corporation. It also makes it easy to transfer ownership through the sale of stock. This makes it easy to get out of the corporation if you don’t want to be part of it anymore, on like the solo proprietorship and…
