Question

Using the concepts and rules from Chapter 20 (business organizations), write a paper that identifies the important characteristics of the four main business organizational forms, and compares their advantages and disadvantages and the extent of potential liability that the owner is exposed to in each organizational form.

Compose the homework assignment in accordance with APA standards and cite a minimum of three scholarly peer reviewed sources (in addition to your textbook and the Bible) as references (word count range 1000-1200 words).

Answer 1

There are 4 main types of business organization: sole proprietorship, partnership, corporation, and Limited Liability Company, or LLC.

Sole Proprietorship

The simplest and most common form of business ownership, sole proprietorship is a business owned and run by someone for their own benefit. The business’ existence is entirely dependent on the owner’s decisions, so when the owner dies, so does the business.

Advantages of sole proprietorship:

• All profits are subject to the owner
• There is very little regulation for proprietorships
• Profit are taxed only oncd
• Owners have total flexibility when running the business
• Very few requirements for starting—often only a business license

Disadvantages:

• Owner is 100% liable for business debts
• Equity is limited to the owner’s personal resources
• Ownership of proprietorship is difficult to transfer
• No distinction between personal and business income

Partnership

These come in two types: general and limited. In general partnerships, both owners invest their money, property, labor, etc. to the business and are both 100% liable for business debts. In other words, even if you invest a little into a general partnership, you are still potentially responsible for all its debt. General partnerships do not require a formal agreement—partnerships can be verbal or even implied between the two business owners.

Limited partnerships require a formal agreement between the partners. They must also file a certificate of partnership with the state. Limited partnerships allow partners to limit their own liability for business debts according to their portion of ownership or investment.

Advantages of partnerships:

• Shared resources provides more capital for the business
• Profits are taxed only once
• Each partner shares the total profits of the company
• Similar flexibility and simple design of a proprietorship
• Partners may have complementary skills
• Inexpensive to establish a business partnership, formal or informal

Disadvantages:

• Each partner is 100% responsible for debts and losses
• Selling the business is difficult—requires finding new partner
• Partnership ends when any partner decides to end it
• Profits must be shared with the partners
• Decision making is divided

Corporation

Corporations are, for tax purposes, separate entities and are considered a legal person. This means, among other things, that the profits generated by a corporation are taxed as the “personal income” of the company. Then, any income distributed to the shareholders as dividends or profits are taxed again as the personal income of the owners.

There are three types of corporations: C-corporation, S-corporation and Limited Liability Company.

C-corporation

A C-corporation is a corporation that is taxed separately from its owners. It gives the owners limited liability, which can encourage more risk-taking and potential investment.

C-corporation advantages

- It is limited liability.
- In regards to transfer of ownership, shareholders can sell their shares.
- Capital is easier to raise through the sale of stock.
- The company pays fringe benefits.
- There are tax benefits.

C-corporation disadvantages

- It is subject to double taxation. (Corporation and shareholder earnings are taxed.)
- It can be costly to form.
- There are more administrative duties. This entity type is required by law to have annual meetings, notify stockholders of the meeting and keep minutes of meetings.
- C-corps pay corporate taxes at a different time than other forms of business.

S-Corporation

An S-corporation, also known as subchapter S-corporation, offers the owners limited liability. S-corporations do not pay income taxes; the earnings and profits are treated as distributions. The shareholders must report their income on individual income tax returns.

S-Corporation advantages

- It enjoys limited liability.
- It avoids double taxation.
- Profits are taxed only once.
- Capital is easier to raise through the sale of stock.
- It offers transfer of ownership.

S-Corporation disadvantages

- It can be costly to form.
- Stockholders are limited to individuals, estates or trustees.
- It is subject to required administrative duties.
- It cannot provide company paid fringe benefits.
- Stockholders are limited to citizens or resident aliens of the United States.

Limited Liability Company (LLC)

Similar to a limited partnership, an LLC provides owners with limited liability while providing some of the income advantages of a partnership. Essentially, the advantages of partnerships and corporations are combined in an LLC, mitigating some of the disadvantages of each.

Advantages of an LLC:

• Limits liability to the company owners for debts or losses
• The profits of the LLC are shared by the owners without double-taxation
• LLCs can have an unlimited number of owners

Disadvantages:

• Ownership is limited by certain state laws
• Agreements must be comprehensive and complex
• Beginning an LLC has high costs due to legal and filing fees
• LLCs have a personal tax liability