When a business forms, the owner or owners must decide how to classify it. The type of classification will ultimately determine the rules under which the business will operate. Six general types of business entities exist with multiple variations thereof. Each type of business entity has advantages and disadvantages and there is no one type of entity that’s better than another. Business owners must decide how their business should be classified based on their individual and unique needs. Several factors will influence the business owner’s decision. These factors include liability, taxes, longevity, control, profit retention, location, and burden.
The sole proprietorship is the most basic type of business. Anyone can start one with little effort. As long as the owner’s name is in the name of the business, no paperwork is necessary. The following advantages and disadvantages exist with a sole proprietorship:
Liability- The owner takes full responsibility for the business and its activities. For example, if the business is unable to pay its bills, the owner will be held responsible for payment. Income Taxes- The business is not subject to a separate tax. The earnings are taxed as the owner’s personal earnings and any losses are written-off of the owner’s tax return. Longevity/Continuity- Once the owner decides to cease business activities or dies, the business dissolves. Control- Only the owner is able to control the business and make decisions. Partners are not permitted to own this type of entity. Profit Retention- The owner retains all of the profits and does not need to be concerned with splitting profits or dividends. Location- Only a single location can exist for this type of entity. If the owner moves, so does the business. Convenience/Burden- Sole proprietorships are very convenient with little burden. There aren’t any regulatory requirements except for filing a DBA in the event the business name does not contain the owner’s name.
A general partnership is formed when two or more individuals form a business. Both partners typically participate in the daily operating activities and have equal amounts of power. Each partner is able to act on each other’s behalf. The following advantages and disadvantages exist with a general partnership:
Liability- Similarly to a sole proprietor, all partners share unlimited liability for the business activities. If the business does not have enough assets to satisfy its debts, creditors are able to pursue the owners’ personal assets. Income Taxes- Similar to a sole proprietor, partnerships are not subject to federal income tax. The partnership serves as a pass-through for income while profits and losses are reported on each partner’s individual tax return. Partnerships are required to file an informational return to report business revenue, expenses, and net income. Longevity/Continuity- In the event when a partner exits the partnership or dies, the partnership is dissolved. The only exception to this rule is when there is a buy-sell agreement in place. The agreement allows the existing partner to buy-out the deceased partner’s share from their heirs and continue business activities. Control- Control is limited to the partners within the partnership. Partners are unable to freely sell their positions within the partnership and outsiders cannot freely buy-in. Profit Retention- Profits are shared by the partners as agreed by each other. It is assumed each partner owns an equal share if there isn’t an agreement in place specifying otherwise. Location- Since general partnerships usually aren’t required to formally register with the state in which it operates, moving a business is simple. It is, however, necessary to file any fictitious names with the state. General partnerships are required to file locally for occupational or specialty licenses as required by the city or county in which the business occupies....
Please join StudyMode to read the full document