Lit1 Task 310.1.2-01-06

Topics: Corporate tax, Corporation, Tax Pages: 8 (2847 words) Published: March 15, 2013
Sole Proprietorship Sole proprietorship is the most common form of business in the United States. It is a relatively simple way for an individual to start a business since legal costs and business requirements are minimal, and the owner has complete control over the business. Though a sole proprietor is not responsible for any corporate tax payments, the owner is responsible for taxes incurred on the income generated from the business as part of his or her personal income tax payments, and personally shoulders any other risks or obligations. A sole proprietor may also choose to file their business under a fictitious business name or a DBA (doing business as), allowing him or her to operate and market the business under a more typical business name rather than their personal name. However, the business is not considered a separate entity and the sole proprietor is still personally liable for all obligations incurred by the business. Characteristics to keep in mind about Sole Proprietorship 1. Liability There is a lack of protection from personal liabilities, meaning that the personal assets of a sole proprietor is at risk in the event of litigation. If the business fails, any creditor can go after the business assets of the business as well as the personal assets of the owner. 2. Income Taxes The business owner is responsible for paying taxes on all profits generated by the business as personal income and does not need to do a separate corporate tax filing. The proprietor can also reduce his or her taxable income by charging off business expenses. 3. Longevity or continuity of the organization Since finding a source of funding is one of the biggest challenges a sole proprietor may face, it hinders the business to have longevity or continuity. In most cases, the funding comes from the proprietor's limited personal assets which can inhibit the future growth of the business. 4. Control The sole proprietor has full control of all the business decisions and can expand, sell, renovate, or close the business at any given time. 5. Profit Retention 100% of the business profits go to the sole proprietor; however, the profits need to be reported as personal income. Return on investment would depend solely on how the business the does since all profits go to the sole proprietor.

6. Location A sole proprietor wishing to relocate the business to another state has very minor implications. The sole proprietor will need to register the business in the new state, which, in most cases, can be done at the county office in which the business is located. In addition, the proprietor may need to obtain new business licenses and permits, and will need to close out the tax year of the old state. General Partnership Partners in a general partnership typically have full authority to carry out business activities on behalf of the business. Additionally, each partner shares equal gains as well as liabilities of the business, unless the partners agree otherwise. General partnerships can be arranged by either oral or written contract between the partners, however, it is an widely observed opinion that a written contract will better protect each partner in court. The simplicity of forming a general partnership may attract entrepreneurs who would like to partner with others on a business venture. With minimal paperwork and the ability to operate in multiple states without having to file for separate permits and licenses can be seen as a considerable advantage, especially to a group with partners from different states. Equal voting rights are usually given, regardless of the size of the capital contributed to the venture by each partner. Though the simplicity of forming a general partnership may be attractive to some, all partners are personally held responsible for all liabilities, including debt and wrongdoing by a fellow partner, which can be a significant disadvantage to forming a general partnership. And in the event the business grows, the...
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