Archive for the 'Company Types' Category

Limited Liability Company LLC

Published at August 16, 2007 in Company Types. 0 Comments

A limited liability company (denoted by L.L.C. or LLC) in the law of many of the United States is a legal form of business company offering limited liability to its owners. It is similar to a corporation, and is often a more flexible form of ownership, especially suitable for smaller companies with a limited number of owners. Unlike a regular corporation, a limited liability company with one member may be treated as a disregarded entity, so the member is often singled-out as a person performing the actions of the LLC. A limited liability company with multiple members may choose, generally at the time that the new entity applies for a US federal taxpayer ID number, to be treated for U.S. federal taxation purposes as a partnership, as a C Corporation, or as an S corporation. An LLC can elect to be either “member managed” or “manager managed.”

Management structures

Choosing to operate by member management creates a flat member or partnership structure. Choosing manager management creates a two-tiered management structure potentially convertible into a corporation, with the attendant tax consequences. LLCs use IRS Form 1065 (if taxed as a partnership) and Schedule SE (Self-Employment Tax). It is often incorrectly called a “limited liability corporation” (instead of company). LLCs are organized with a document called the “articles of organization”, or “the rules of organization” specified publicly by the state; additionally, it is common to have an “operating agreement” privately specified by the members. The operating agreement is a contract among the members of an LLC governing the membership, management, operation and distribution of income of the company.

Managing members are the individuals who are responsible for the maintenance, administration and management of the affairs of a LLC. In most states, the managers serve a particular term and report to and serve at the discretion of the members. Specific duties of the managers may be detailed in the articles of organization or the operating agreement of the LLC. In some states, the members of an LLC may also serve as the managers.

Members are the owner(s) of a LLC. Unless the articles of organization or operating agreement provide otherwise, management of an LLC is vested in the members in proportion to their ownership interest in the company.

Operating as an LLC form of partnership does not mean that appropriate US federal partnership tax forms are not necessary, or not complex. As a partnership, the entity’s income and deductions attributed to each member are reported on that owner’s tax return.

LLCs can lose their tax advantage without the partnership structure. The possible label “disregarded entity” for income tax purposes singles out the one-member owner of an LLC as actually earning income and deductions directly. It is the owner, then, who reports as a business proprietor, rather than as an LLC operating an active trade or business. An LLC passively investing in real estate and owned by a single member would have its income and deductions reported directly on the owner’s individual tax return on a Schedule E tax form. And an LLC owned by a corporation–in other words, an LLC with a single corporate member–would be treated as an incorporated branch and have its income and deductions reported on the corporate tax return, creating double taxation.

Advantages

  • No requirement of an annual general meeting for shareholders.
  • No loss of power to a board of directors.
  • Much less administrative paperwork and recordkeeping.
  • Pass-through taxation (i.e., no double taxation), unless the LLC elects to be taxed as a corporation.
  • Limited liability, meaning that the owners of the LLC, called “members,” are protected from liability for acts and debts of the LLC.
  • Using default tax classification, profits are taxed personally at the member level, not at the LLC level.
  • Check-the-box taxation. An LLC can elect to be taxed as a sole proprietor, partnership, S-corp or corporation, providing much flexibility.
  • LLCs in some states can be set up with just one natural person involved.
  • Membership interests of LLCs can be assigned, and the economic benefits of those interests can be separated and assigned, providing the assignee with the economic benefits of distributions of profits/losses (like a partnership), without transferring the title to the membership interest (i.e., See VA and Delaware LLC Acts).
  • LLCs in some states are treated as entities separate from their Members (See VA LLC Act), whereas in other jurisdictions case law has developed deciding LLCs are not considered to have separate juridical standing from their members (See recent D.C. decisions).
  • Unless the LLC has chosen to be taxed as a corporation, income of the LLC generally retains its character, for instance as capital gains or as foreign sourced income, in the hands of the members.

Disadvantages

  • Many states, including Alabama, California, Kentucky, New Jersey, New York, Pennsylvania, Tennessee, and Texas, levy a franchise tax or capital values tax on LLCs. (Beginning in 2007, Texas has replaced its franchise tax with a “margin tax”.) In essence, this franchise or business privilege tax is the “fee” the LLC pays the state for the benefit of limited liability. The franchise tax can be an amount based on revenue, an amount based on profits, or an amount based on the number of owners or the amount of capital employed in the state, or some combination of those factors, or simply a flat fee, as in Delaware. Effective in Texas for 2007 the franchise tax is replaced with the Texas Business Margin Tax. This is paid as: tax payable = revenues minus some expenses with an apportionment factor. In most states, however, the fee is nominal and only a handful charge a tax comparable to the tax imposed on corporations.
  • It may be more difficult to raise capital for an LLC, as investors may be more comfortable investing funds in the better-understood corporate form with a view toward an eventual IPO. One possible solution may be to form a new corporation and merge into it, dissolving the LLC and converting over to a corporation.
  • The LLC form of organization is relatively new, and as such, some states do not fully treat LLCs in the same manner as corporations for liability purposes, instead treating them more as a disregarded entity, meaning an individual operating a business as an LLC may in such a case be treated as operating it as a sole proprietorship, or a group operating as an LLC may be treated as a general partnership, which defeats the purpose of establishing an LLC in the first place, to have limited liability (a sole proprietor has unlimited liability for the business; in the case of a partnership, the partners have joint and several liability, meaning any and all of the partners can be held liable for the business’ debts no matter how small their investment or percentage of ownership is).
  • Although there is no public requirement for an operating agreement, members who operate without one may run into problems.
  • Some people, such as new business people, may not be familiar with the governance of LLCs. Unlike corporations, they are not required to have a board of directors or officers.
  • The principals of LLCs use many different titles — e.g., member, manager, managing member, managing director, chief executive officer, president, partner — some of which are not correct. As such, it can be difficult to determine who actually has the authority to enter into a contract on the LLC’s behalf.

Variations

  • A Professional Limited Liability Company (PLLC or P.L.L.C.) is a limited liability company organized for the purpose of providing professional services. Usually, professions where the state requires a license to provide services, such as a doctor, chiropractor, lawyer, accountant, architect, or engineer, require the formation of a PLLC. Exact requirements of PLLCs vary from state to state.
  • A Series LLC is a special form of a Limited liability company that provides extra protection for personal assets comprised of multiple business entities.

Names and abbreviations

Most states require that the company name contain one of the following terms, with some variation by state:

  • Limited Liability Company, L.L.C., or LLC
  • Limited Company, L.C., or LC
  • Ltd. Co.

Limited liability companies may not use the following terms on their own:

  • Company or Co. — reserved for corporations in most states
  • Limited or Ltd. — reserved for corporations in Texas (except in Nevada, which allows the use of Limited or Ltd.)
A few more you might be interested in:
  • No related posts

    • Limited Liability Partnership LLP

    Published at August 12, 2007 in Company Types. 0 Comments

    A limited liability partnership (LLP) has elements of partnerships and corporations. In an LLP, all partners have a form of limited liability, similar to that of the shareholders of a corporation. However, the partners have the right to manage the business directly, and (in many areas) a different level of tax liability than in a corporation.

    Limited liability partnerships are distinct from limited partnerships, in that limited liability is granted to all partners, not to a subset of non-managing “limited partners.” As a result the LLP is more suited for businesses where all investors wish to take an active role in management.

    There is considerable confusion between LLPs as constituted in the US and that introduced in the UK in 2001 and adopted elsewhere - see below - since the UK LLP is, despite the name, specifically legislated as a Corporate body rather than a Partnership.

    United States

    In the United States, each individual state has its own law governing their formation. Limited liability partnerships emerged in the early 1990s: while only two states allowed LLPs in 1992, over forty had adopted LLP statutes by the time LLPs were added to the Uniform Partnership Act in 1996.

    Although found in many business fields, the LLP is an especially popular form of organization among professionals, particularly lawyers, accountants and architects. In some U.S. states (including California and New York), LLPs can only be formed for such professional uses.

    The liability of the partners varies from state to state. Section 306(c) of the UPA (a standard statute adopted by many states) grants LLPs a form of limited liability similar to that of a corporation:

    An obligation of a partnership incurred while the partnership is a limited liability partnership, whether arising in contract, tort, or otherwise, is solely the obligation of the partnership. A partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for such an obligation solely by reason of being or so acting as a partner.

    However, a sizable minority of states only extend such protection against negligence claims, meaning that partners in an LLP can be personally liable for contract and intentional tort claims brought against the LLP.

    As in a partnership or limited liability company (LLC), the profits of an LLP are distributed among the partners for tax purposes, avoiding the problem of “double taxation” often found in corporations.

    Some US states have combined the LP and LLP forms to create limited liability limited partnerships.

    A few more you might be interested in:
  • No related posts

    • Limited Partnership

    Published at August 12, 2007 in Company Types. 0 Comments

    A limited partnership is a form of partnership similar to a general partnership, except that in addition to one or more general partners (GPs), there are one or more limited partners (LPs).

    The GPs are, in all major respects, in the same legal position as partners in a conventional firm, i.e. they have management control, share the profits of the firm in predefined proportions, and have joint and several liability for the debts of the partnership. As in a general partnership, the GPs have apparent authority as agents of the firm to bind all the other partners in contracts with third parties.

    Like shareholders in a corporation, the LPs have limited liability, i.e. they are only liable on debts incurred by the firm to the extent of their registered investment, and they have no management authority. The GPs pay the LPs the equivalent of a dividend on their investment, the nature and extent of which is usually defined in the partnership agreement.

    Limited partnerships are distinct from limited liability partnerships, in which all partners have limited liability.

    Limited liability

    When the partnership is being constituted or the composition of the firm is changing, LPs are generally required to file documents with the relevant state registration office. LPs must also explicitly disclose their LP status when dealing with other parties, so that such parties are on notice that the individual negotiating with them carries limited liability. It is customary that the notepaper, other documentation, and electronic materials issued to the public by the firm will carry a clear statement identifying the legal nature of the firm and listing the partners separately as general and limited. Hence, unlike the GPs, the LPs do not have inherent agency authority to bind the firm unless they are subsequently held out as agents and so create an agency by estoppel or acts of ratification by the firm create ostensible authority.

    The limited liability enjoyed by LPs is contingent upon their refraining from taking any active role in the management of the firm. If LPs do assume a management role, they become GPs, and thus lose their limited liability protection and acquire the status of an agent.

    History

    The earliest limited partnerships were called societates publicanorum and arose in Rome in the third century B.C. During the heyday of the Roman Empire they were roughly equivalent to today’s major corporations: many had hundreds of investors, and interests were publicly tradable. However, they required at least one (and often several) partners with unlimited liability.

    In medieval Italy, the concept was revived around the 10th century as the commenda, a business organization which was generally used for financing maritime trade. In a commenda, the traveling trader of the ship had unlimited liability, but his investment partners on land were shielded. A commenda was not a common form for a long-term business venture as most long-term businesses were still expected to be secured against the assets of their individual proprietors.[1]

    Colbert’s Ordinance of 1673 and the Napoleonic Code of 1807 reinforced the limited partnership concept in European law. In the United States, limited partnerships became widely available in the early 1800s, although a number of legal restrictions at the time made them unpopular for business ventures. Britain enacted its first limited partnership statute in 1907.[2]

    United States

    In the United States, the LP organization is most common in the film industry or in types of businesses that focus on a single or limited-term project. They are also useful in “labor-capital” partnerships, where one or more financial backers prefer to contribute money or resources while the other partner performs the actual work. In such situations, liability is the driving concern behind the choice of LP status. The LP is also attractive to firms wishing to provide shares to many individuals without the additional tax liability of a corporation. Private equity companies almost exclusively use a combination of general and limited partners for their investment funds. Well-known limited partnerships include Carnegie Steel Company, Bloomberg L.P. and CNN.

    In some states, an LP can elect to become a limited liability limited partnership (or LLLP). In this arrangement, the general partners are liable only for the business debts of the company, and not for acts of malpractice or other wrongdoing done by the other partners in the course of the partnership’s business.

    A few more you might be interested in:
  • No related posts

    • General Partnership

    Published at August 12, 2007 in Company Types. 0 Comments

    In the commercial and legal parlance of most countries, a General partnership or simply a Partnership refers to an association of persons or an unincorporated company with the following major main features:

    • Formed by two or more persons
    • The owners are all liable for legal actions and debts the company may face personally
    • Created by agreement, proof of existence and estoppel.

    Characteristics

    For the most part, the partners own the business assets together and are personally liable for business debts.

    Profits are shared equally amongst the partners. A partnership agreement, however, will usually provide for the manner in which profits and losses are to be shared.

    Each partner is, jointly and severally, personally liable for debts and taxes of the partnership. For example, if the partnership assets are insufficient to satisfy a creditor’s claims, the partners’ personal assets are subject to attachment and liquidation to pay the business debts.

    Each general partner is deemed the agent of the partnership. Therefore, if that partner was apparently carrying on partnership business, all general partners can be held liable for his dealings with third persons.

    Each partner may be held jointly and severally liable for a co-partner

    wrongdoing or tortious act (e.g. the misapplication of another person's money or property).

    Technically, a partnership terminates upon the death, disability, or withdrawal of any one partner. However, most partnership agreements provide for these types of events with the share of the departed partner being purchased by the remaining partners in the partnership.

    Each general partner has an equal right to participate in the management and control of the business. Disagreements in the ordinary course of partnership business are decided by a majority of the partners. Disagreements of extraordinary matters and amendments to the partnership agreement require the consent of all partners.

    Unless otherwise provided in the partnership agreement, no one can become a member of the partnership without the consent of all partners.

    However, a partner may assign his share of the profits and losses and right to receive distributions (”transferable interest”). Further a partner’s judgment creditor may obtain an order charging the partner’s “transferable interest” to satisfy a judgment.

    Separate legal personality

    There has been considerable debate in most states as to whether a partnership should remain aggregate or be allowed to become a business entity with a separate legal personality.

    In the United States, section 201 of the Revised Uniform Partnership Act (RUPA) of 1994 provides that “A partnership is an entity distinct from its partners.” Likewise, the UK Law Commission in Report 283 [1] has proposed to amend the law to create separate personality for all general partnerships (the Limited Liability Partnerships Act 2000 does confer separate personality on LLPs).

    While France, Luxembourg, Norway, the Czech Republic and Sweden also grant some degree of legal personality to commercial partnerships, other countries such as Belgium, Germany, Switzerland, and Poland do not allow partnerships to acquire a separate legal personality, but permit partnerships the rights to sue and be sued, to hold property, and to postpone a creditor’s lawsuit against the partners until he or she has exhausted all remedies against the partnership assets.

    In December 2002 the Netherlands proposed to replace their ordinary partnership, which does not have legal personality, with a public partnership which allows the partners to opt for legal personality.

    Japanese law provides for Civil Code partnerships (組合 kumiai?), which have no legal personality, and Commercial Code partnership corporations (持分会社 mochibun kaisha?) which have full corporate personhood but otherwise function similarly to partnerships.

    The two main consequences of allowing separate personality are that one partnership will be able to become a partner in another partnership in the same way that a registered company can, and a partnership will not be bound by the doctrine of ultra vires but will have unlimited legal capacity like any other natural person.

    A few more you might be interested in:
  • No related posts

    • C Corporation

    Published at August 12, 2007 in Company Types. 0 Comments

    A C corporation (or “C corp.”) is a corporation in the United States that, for Federal income tax purposes, is taxed under 26 U.S.C. § 11 and Subchapter C (26 U.S.C. § 301 et seq.) of Chapter 1 of the Internal Revenue Code.[1] Most major companies (and many smaller companies) are treated as C corporations for Federal income tax purposes.

    C corporation vs. S corporation

    Although the income of a C corporation is taxed, the income of an S corporation (with a few exceptions) is not taxed under the Federal income tax laws.

    Unlike corporations treated as S corporations, a corporation may qualify as a C corporation without regard to any limit on the number of shareholders, foreign or domestic.

    Steps to forming a C corporation

    • 1. Choose an available business name that complies with your state’s corporation rules.
    • 2. Appoint the initial directors of your corporation.
    • 3. File formal paperwork, usually called “articles of incorporation,” and pay a filing fee that ranges from $100 to $800, depending on the state where you incorporate.
    • 4. Create corporate “bylaws,” which lay out the operating rules for your corporation.
    • 5. Hold the first meeting of the board of directors.
    • 6. Issue stock certificates to the initial owners (shareholders) of the corporation.
    • 7. Obtain licenses and permits that may be required for your business.

    Taxable income list

    Taxable Income ($) Tax Rate Deduction ($)
    0 to 50,000 15% 0
    50,000 to 75,000 25% 5,000
    75,000 to 100,000 34% 11,750
    100,000 to 335,000 39% 16,750
    335,000 to 10,000,000 34% 0
    10,000,000 to 15,000,000 35% 100,000
    15,000,000 to 18,333,333 38% 550,000
    18,333,333 and up 35% 0

    [edit] Notes

    A few more you might be interested in:
  • No related posts

    • S Corporation

    Published at August 12, 2007 in Company Types. 0 Comments

    An S corporation or S-corp, for US federal tax purposes, is a corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code.

    Unlike a regular C corporation, an S corporation generally pays no corporate income taxes on its profits. Instead, the shareholders in the S corporation pay income taxes on their proportionate shares, called distributive shares, of the S corporation’s profits. Shareholders must report the income (and pay a related tax, if any) regardless of whether the shareholders receive distributions from the S corporation.

    Qualification for S corporation status

    In order to make an election to be treated as an S corporation, the following requirements must be met:

    • Must be an eligible entity (a domestic corporation, a partnership or a single-member or multiple member limited liability company).
    • Must not have more than 100 shareholders.[1][2]
      • Spouses are automatically treated as a single shareholder. Families, defined as individuals descended from a common ancestor, plus spouses and former spouses of either the common ancestor or anyone lineally descended from that person, are considered a single shareholder as long as any family member elects such treatment.[2]
    • Shareholders must be U.S. citizens or residents, and must be natural persons, so corporate shareholders and partnerships are to be excluded. However, certain tax-exempt corporations, notably 501(c)(3) corporations, are permitted to be shareholders.[3]
    • Must have only one class of stock.
    • Profits and losses must be allocated to shareholders proportionately to each one’s interest in the business.

    If a corporation meets the foregoing requirements and wishes to be taxed under Subchapter S, its shareholders may file Form 2553: “Election by a Small Business Corporation” [4][5] with the IRS within 75 days of the first tax year. The 2553 form must be signed by all of the corporation’s shareholders. If a shareholder resides in a community property state, the shareholder’s spouse generally must also sign the 2553.

    The S corporation election must typically be made within two months and fifteen days after the beginning of the tax year for which the election is to take effect, or at any time during the year immediately preceding the tax year for which the election is to take effect. However, Congress has directed the IRS to show leniency with regard to late S elections. Accordingly, oftentimes, the IRS will accept a late S election.

    Some states such as New York require a separate state-level S election in order for the corporation to be treated, for state tax purposes, as an S corporation.

    If a corporation that has elected to be treated as an S corporation ceases to meet the requirements (for example, if as a result of stock transfers, the number of shareholders exceeds 125 or an ineligible shareholder such as a nonresident alien acquires a share), the corporation will lose its S corporation status and revert to being a regular C corporation.

    Taxation issues

    FICA

    The FICA tax need only be paid on employee wages and not on distributive shares. Because FICA tax is avoided on distributive shares, the IRS and equivalent state revenue agencies may recategorize distributions paid to shareholder-employees as wages if shareholder-employees are not paid a reasonable wage for their positions within the company.

    Distributions

    Actual distributions of funds, as opposed to distributive shares, typically have no effect on shareholder tax liability. The term “pass through” refers not to assets distributed by the corporation to the shareholder, but instead to the portion of the corporation’s income, losses, deductions or credits that are reported to the shareholder on Schedule K-1 and are shown by the shareholder on his or her own income tax return. However, a distribution to a shareholder that is in excess of the shareholder’s basis in his or her stock is taxed to the shareholder as capital gain.

    Conversion from C corporation

    S corporations that have previously been C corporations may also, in certain circumstances, pay income taxes on untaxed profits that were generated when the corporation operated as a C corporation. This is very common with uncollected accounts receivable or appreciated real estate.

    Example: If an S corporation that was formerly a C corporation sells an appreciated asset (such as real estate) and the appreciation occurred during the time the corporation was a C corporation, the S corporation will probably pay C corporation taxes on the appreciation–even though the corporation is an S corporation. This Built In Gain (BIG) tax rate is 35% on the appreciated property, but is only realized if the BIG property is sold within 10 years.

    Taxation of S Corporation Distributive Share

    While an S corporation is not taxed on its profits, the owners of an S corporation are taxed on their proportional shares of the S corporation’s profits.

    Example: Widgets Inc, an S-Corp, makes $10,000,000 in net income (before payroll) in 2006 and is owned 51% by Bob and 49% by John. Keeping it simple, Bob and John both draw salaries of $94,200 (which is the Social Security Wage Base for 2006, after which no further Social Security tax is owed).

    Employee salaries are subject to FICA tax (Social Security & Medicare tax)–currently 15.3 percent–half of which is paid by both the employer and employee. The distribution of the additional profits from the S-Corp will be done without any further FICA tax liability.

    Widgets Inc now has $9,797,187 of net income for 2006, after paying salaries ($10,000,000 - $94,200 * 0.0765 [employer FICA] * 2 employees). On Bob’s personal tax return, he will report $4,996,565 of business income (in addition to his $94,200 salary), and John will report $4,800,622. Also, remember that Bob and John each had the employee half of the FICA tax withheld from their salaries (94,200 * 0.0765 = 7,206.30 each.)

    If for some reason, Bob (as the majority owner) were to decide not to distribute the money, both Bob and John would still owe taxes on their pro-rata allocation of business income, even though neither received any cash distribution. To avoid this “phantom income” scenario, S corporations commonly use shareholder agreements that stipulate at least enough distribution must be made for shareholders to pay the taxes on their distributive shares.

    Quarterly estimated taxes must be paid by the individual to avoid tax penalties. Even if “phantom income”.

    Bob and John will recognize significant tax savings compared to drawing the remainder of the business income as a salary subject to FICA taxation. While they have paid the maximum salary for which Social Security tax is assessed, there is no wage base for the 1.45 percent Medicare tax portion of FICA. By avoiding the employer and employee portions of FICA on this amount (2.9 percent) they will together save a total of $284,118.

    The difference would be even greater, percentage-wise, if Bob and John were paying themselves less than the Social Security Wage Base, as the Social Security portion of FICA is 12.4 percent (total for the employer and employee halves).

    IRS Study of S Corporation Reporting Compliance

    In 2005, the IRS launched a study to assess the reporting compliance of S corporations[6]. The study will examine 5,000 randomly selected S corporation returns from tax years 2003 and 2004, with audits expected to begin in late 2005. The IRS intends to use the results to measure compliance in recording of income, deductions and credits from S corporations, and to formulate future audit criteria to better target likely non-compliant returns. This is part of a larger IRS effort to improve tax compliance and reduce the estimated $300 billion gap in gross reported figures each year. A large portion of that gap is thought to come from small businesses, and particularly S Corporations, which are now the most common corporate entity, numbering over 3 million in 2002, up from about 750,000 in 1985.

    Filing Form 1120S

    Form 1120S generally must be filed by March 15th of the year immediately following the calendar year covered by the return or, if a fiscal year (a year ending on the last day of a month other than December) is used, by the 15th day of the third month immediately following the last day of the fiscal year. Included in Form 1120S is a Schedule K-1 for each person who was a shareholder at any time during the tax year.

    Some but not all states recognize a state tax law equivalent to an S corporation, so that the S corporation in certain states may be treated the same way for state income tax purposes as it is treated for Federal purposes. A state taxing authority may require that a copy of the Form 1120S return be submitted to the State with the state income tax return.

    California, New York City additional taxes

    S-corps pay a franchise tax of 1.5% of net income in the state of California (minimum $800). This should be taken into consideration when deciding on using a Limited liability company versus an S-corporation in California. On highly profitable enterprises, the LLC franchise tax fees, which are based on gross revenues (minimum $800), may be lower than the 1.5% net income tax. Conversely, on high gross revenue businesses, the LLC franchise tax fees may exceed the S corp net income tax.

    In New York City, S-corporations are subject to the full corporate income tax at a 8.85% rate. However if the S-corporation can demonstrate that a portion of its business was done outside the city, that portion will not be subject to the additional tax.

    A few more you might be interested in:
  • No related posts

    • Sole Proprietorship

    Published at August 12, 2007 in Company Types. 0 Comments

    A sole proprietorship, or simply proprietorship, is a type of business entity which legally has no separate existence from its owner. Hence, the limitations of liability enjoyed by a corporation and limited liability partnerships do not apply to sole proprietors. All debts of the business are debts of the owner. It is a “sole” proprietor in the sense that the owner has no partners. A sole proprietorship essentially means a person does business in their own name and there is only one owner. A sole proprietorship is not a corporation; it does not pay corporate taxes, but rather the person who organized the business pays personal income taxes on the profits made, making accounting much simpler. A sole proprietorship need not worry about double taxation like a corporate entity would have to.

    Most sole proprietors will register a trade name or “Doing Business As“. This allows the proprietor to do business with a name other than his or her legal name and also allows the proprietor to open a business account with banking institutions.

    Advantages

    An entrepreneur may opt for the sole proprietorship legal structure because of the advantages it offers to small businesses. There is better control and business administration possible since there is only one owner, who can make decisions quickly without having to consult others. In most cases, there are no legal formalities to forming or dissolving a business. Furthermore, in many jurisdictions, a sole proprietorship files simpler tax returns to report its business activity. In the United States, for example, a sole proprietorship reports its income and deductions using a simple one or two page tax return form. In comparison, an identical small business operating as a corporation or partnership would be required to prepare and submit a tax return several pages in length plus quarterly and annual payroll tax returns. Additionally, all of the profits from the business go right to the owner. A sole proprietorship often has a lot of freedom from government regulations. Every form of business ownership has some sort of government regulation, but in general, the sole proprietorship has the least.there is also the advantage of enjoyment of entire profit. being the sole owner he need not share his profit. there are more chances for maintaining secrecy. as he is the single person managing the business he is not expected to share his business secrets

    Disadvantages

    A business organized as a sole trader will likely have a hard time raising capital since shares of the business cannot be sold, and there is a smaller sense of legitimacy relative to a business organized as a corporation or limited liability company. It can also sometimes be more difficult to raise bank finance, as sole proprietorships cannot grant a floating charge which in many jurisdictions is a sine qua non of bank financing. Hiring employees may also be difficult. This form of business will have unlimited liability, therefore, if the business is sued, the proprietor is personally liable. The life span of the business is also uncertain. As soon as the owner decides not to have the business anymore, or the owner dies, the business ceases to exist.

    In countries without a National Health Service, such as United States, a sole proprietor is also responsible for his or her own health insurance, and may find difficulty finding any if one of the family members to be covered has a previous health issue. Another disadvantage of a sole proprietorship is that as a business becomes successful, the risks accompanying the business tend to grow. To minimize those risks, a sole proprietor has the option of forming a limited liability company, or LLC. Note that such an LLC would still be treated as a sole proprietorship for income tax accounting purposes.

    A few more you might be interested in:
  • No related posts