Characteristics and liability structures of sole proprietorships and partnerships

Task 2 Part A

Sole Proprietorship

Description A sole proprietorship is a small unincorporated company which is typically owned and operated by a single individual.

Two Advantages An advantage is that the individual has full control over the entire business; another is that tax processes are simplified.

Two Disadvantages One of the disadvantages of a sole proprietorship is that there are very few options for subsidizing healthcare—individuals typically have to purchase it. Other disadvantages are that all of the work must be done by the individual.

Liability Sole Proprietorships are dangerous because with them, the individual has no limits to liability.

Income taxes Income taxes are not bad with this option because individuals are only taxed once.

Continuity of the organization Continuity of business is relatively simple, since if an owner were to retire the proprietorship would end.

Control An individual has sole control of this entity and takes all the profits.

Profit retention An individual has sole control of this entity and takes all the profits.

General Partnership

Description A general partnership is an agreement between two or a limited number of people to engage in business together

Two Advantages Advantages include the degree of control available in a general partnership. A second advantage is that business entities as partnerships do not have to pay income tax. This is for the reason that every partner files the profits or losses generated by the business on his or her individual personal income tax return. As a result, the business itself does not get taxed separately.

Two Disadvantages Disadvantages include that there is frequently few limitations on personal liability, and that one’s partners can subject one to financial risk.

Liability In a general partnership there are no limits to liability

Income taxes Partners are only taxed once as individuals and must file taxes separately

Continuity of the organization The continuity of the organization goes from one partner to the next, although partners can specify percentages if they like.

Control Control of the organization is between the partners.

Profit retention The partners split the profits as they like, which is generally speaking split evenly (Lau and Johnson, 2011).

Limited partnership

Description Limited partnerships are akin to general partnerships with the exception that there is one general partner and other different limited partner. In this regard, the general partner is liable for managing the business whereas the limited partner solely makes contributions to the assets of the business and is not responsible for any management.

Two Advantages Advantages include limited personal liability and limited taxation requirements. Another advantage is that there it is easier to appeal to different investors for the reason that limited partners have limited liability to the debt obligations of the business.

Two Disadvantages Disadvantages include the fact the general partner manages the partnership so there is less control. Another disadvantage is that the general partner is completely liable for the debts incurred by the business.

Liability In a limited partnership there are liability limits for the limited partners and less for general partners.

Income taxes Limited and general partners file income taxes individually.

Continuity of the organization Organizational continuity is shared between the partners with the limited partner last in line.

Control Limited partners have minimal control and day to day management.

Profit retention The partners agree how to split the profits.

C-Corporation

Description A C corporation is a general corporation (not an S corporation).

Two Advantages One of the advantages of this type of corporation is that it is a separate legal entity (Wood, 2012). As such, there is limited liability associated with it. Another benefit is that it has shareholders who are responsible for some of the costs.

Two Disadvantages Disadvantages include a tax structure that effectively taxes owners twice (they book) and having officers govern it.

Liability A (C) corporation’s liability is limited to business assets. Shareholders have limited liability for the actions and liabilities of the S-Corporations. Rather, the assets of the corporation are accessible to creditors, but the individual assets of the shareholders are protected. Shareholders are solely at risk of loss of their investment in the corporation.

Income taxes Corporations are subject to net income taxes and dividend taxes at all three taxation levels.

Continuity of the organization Organizational continuity propagates despite changes in ownership since corporations are legal entities.

Control Chief executive officers are in control of day to day management. The board of directors selected by the shareholders manage the business operations of the corporation. Shareholders have limited rights in participating in management but may have the right to vote on extraordinary transactions.

Profit retention Profits are split between shareholders and owners in accordance to their ownership percentages.

S-Corporation

Description An S corporation is a type of corporation with a different tax system than a C corporation.

Two Advantages Advantages are that S corporations are only taxed once and there are limited liabilities for those involved with it.

Two Disadvantages The disadvantages of these corporations relates to shareholder restrictions. Shareholders must be U.S. citizens. Also, there can be no more than 100 shareholders.

Liability Shareholders have limited liability for the actions and liabilities of the S-Corporations. Rather, the assets of the corporation are accessible to creditors, but the individual assets of the shareholders are protected.

Income taxes They are taxed at the dividend level; individuals pay income taxes too (Lau and Johnson, 2011).

Continuity of the organization Continuity of the organization is ongoing to shareholders despite ownership changes.

Control Control of an S-corporation is handed to the board of directors, who are elected by the shareholders of the corporation. As a result, the shareholders have minimal rights to control the corporation’s operations.

Profit retention Profit retention is in accordance to ownership percentages.

Limited Liability Company

Description A limited liability company is a combination of a partnership and a business.

Two Advantages The main advantages are that there are limitations to the personal liabilities of members of such an entity. Another is that members are involved in the management of the entity as a whole.

Two Disadvantages One of the disadvantages is that such entities are managed at the state level, so there’s differences in how they work. Another is that taxes can be assessed for either partnerships or companies with this option (Lau and Johnson, 2011).

Liability LLCs have limited liability confined to business assets.

Income taxes Because members of LLCs are not deemed to be their employees, but instead self-employed owners of the business, they are not subject to tax withholding. Rather, every member of the LLC is liable for putting funds aside that is sufficient to pay taxes on his or her profits generated.

Continuity of the organization LLC’s can decide how they want to facilitate organizational continuity and declare so in writing.

Control Those who form an LLC have daily responsibility for their operation.

Profit retention Profit retention is distributed in accordance to the written desires of LLC members.

Task 2 Part B  M E M O R A N D U M