Forms of Business, Sole Proprietorship

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Sole Proprietorship

Sole proprietorship is the most simple and common form of business that is unincorporated but owned and run by one person and with no distinction between the business and the owner. According to Pride, Hughes & Kapoor (2012), formation of a sole proprietorship does not need any formal action and is very easy and an inexpensive form. Since the business and the owner are regarded as one, the business income is the owner’s income and the owner shares the losses. It is also apparent that the business income is not taxed separately like other forms of business such as corporation.

Sole proprietors enjoy complete control of their businesses and are entitled to make any decision concerning their businesses. There are no consultations involved in the decision making process. Moreover, tax preparation process is very easy since the business is not taxed separately and the tax rates are lowest of the business structures. According to Pride, Hughes & Kapoor (2012), owners of the business are always free to mix business or personal assets. Unfortunately, sole proprietorship involves unlimited personal liability since there is no legal separation between the owner and the business. The owner of a business can be held responsible for the debts and obligations of the business and the risk extends to any liability incurred by employee actions. Raising capital for sole proprietor is always not easy because stock in the business cannot be sold and the investors cannot invest in them. Additionally, sole proprietorship seldom survive the death or disability of the owners

Partnership

Partnership involves relationship between two or more people coming together on a trade and every person contributes money, property, labor, or skills. It is also worth noting that every partner shares in the profits and losses and as much as it is strongly recommended, it is regarded very risky to operate without.

There are three types of partnership arrangements including general partnerships, limited partnerships, and joint ventures. General partnership requires that profits, liability and management issues are equally divided amongst the partners and incase of unequal distribution, the proportion set is documented in the partnership agreement (Pride, Hughes & Kapoor, 2012). On the other hand the limited partnership enables partners to have limited liability d input as far as management decisions are concerned and the limits are based on each partner’s investment portion. Finally, the joint venture work almost like the general partnership but is always active for a short period or may be for a single project.

Partners include their individual share of income or loss on their personal tax returns and their taxes generally are annual return of income, employment tax, and estimated tax. Partnership involves shared financial commitment due to the advantage of pooling resources to obtain capital and this may help in securing credit. Furthermore, partnership involves complementary skills derived from the partners’ strengths, resources, and expertise. Partnership may also attract highly motivated and qualified employees due to incentives such as offering opportunity to employees to become members. However, joint and individual liability acts as a disadvantage where partners are liable for their own actions and for business, debts, and decisions made by other partners and the personal assets for partners may be used to satisfy the partnership debts. Decision making process may also not be easy exposing partners to disagreements amongst partners.

Corporation

Corporation is a complex form of business and is an independent legal entity that is owned by shareholders and is held legally liable for the actions and debts of the business. Incorporating corporations is very costly due to the administration fees, complex tax and the legal requirements making it suitable for established and large companies.

According to Pride, Hughes & Kapoor (2012), corporation is a separate tax paying entity and is required to pay federal, state or may be local tax and most businesses must register with the IRS as well as state and local revenue agencies. Corporation has several advantages including limited liability where business debts and actions of the entity do not affect shareholders personal assets and the business has the ability to generate capital such as through the sale of assets. Moreover, corporations are normally attractive to potential employees due to the competitive benefits and the potential for partial ownership via stock options associated with them. Nevertheless, there are some disadvantages linked with corporation such as the fact that they are costly and time-consuming forms of business to venture and start (Pride, Hughes & Kapoor, 2012). In addition, corporations may involve double taxing particularly when the company’s profit is taxed and the shareholders’ dividends are taxed.

Due to the ease of start, sole proprietorship is the most common form of business in America. There are no formal documents as long as the business is conducted under the owner’s legal name and the sole proprietor can maintain complete control over all aspects of the business. Not much capital is required in starting the business.

Reference

Pride, W. M., Hughes, R. J., & Kapoor, J. R. (2012). Business. Mason, OH: South-Western Cengage Learning.