Discuss the advantages and disadvantages or sole proprietorships, partnerships, and corporations.
There are distinct advantages and disadvantages of each of these structures. When looking at forming any of these you must first look at who will be forming these.
1. Sole proprietorships;
Individuals and small companies are better suited for sole proprietorships. There are several reasons why this is.
a. Few business requirements
b. Little or no cost to form.
c. Tax advantages, can be claimed on your 1040
d. Single decision maker
There are however some disadvantages of this structure such as liability. As a sole proprietor you are personally liable to any lawsuits or court actions. 2. Partnerships;
Again partnerships are similar to a sole proprietorship except there are two or more individuals involved in the business.
a. Few business requirements
b. Little or no cost to form.
c. Tax advantages, income can be claimed on individual 1040
The disadvantages are more complex and tend to ruin friendships or relationships. These disadvantages need to be spelled out in a partnership agreement before the partnership is formed.
a. Deciding who will do what in the partnership.
b. Death or dissolution of a partner.
c. Liability.
d. Divorce of a partner.
3. Corporations;
Corporations are more even more complex and better suited for larger groups of people or individuals who have a large amount of assets that need protection. Individuals can form corporations to protect assets as well. There are several types of corporations that can be formed. LLC, S Corp. and C Corp. are of the most common.
a. Asset Protection.
b. Corporate Tax Treatment. Single member LLC is still claimed on 1040.
c. Transferable Shares can be sold.
d. Capital Incentive can attract talented employees by offering stock options.
Disadvantages of corporations;
a. Formalities.
b. Multiple decision makers
c. Fees to operate and incorporate.
1. Sole proprietorships;
Individuals and small companies are better suited for sole proprietorships. There are several reasons why this is.
a. Few business requirements
b. Little or no cost to form.
c. Tax advantages, can be claimed on your 1040
d. Single decision maker
There are however some disadvantages of this structure such as liability. As a sole proprietor you are personally liable to any lawsuits or court actions. 2. Partnerships;
Again partnerships are similar to a sole proprietorship except there are two or more individuals involved in the business.
a. Few business requirements
b. Little or no cost to form.
c. Tax advantages, income can be claimed on individual 1040
The disadvantages are more complex and tend to ruin friendships or relationships. These disadvantages need to be spelled out in a partnership agreement before the partnership is formed.
a. Deciding who will do what in the partnership.
b. Death or dissolution of a partner.
c. Liability.
d. Divorce of a partner.
3. Corporations;
Corporations are more even more complex and better suited for larger groups of people or individuals who have a large amount of assets that need protection. Individuals can form corporations to protect assets as well. There are several types of corporations that can be formed. LLC, S Corp. and C Corp. are of the most common.
a. Asset Protection.
b. Corporate Tax Treatment. Single member LLC is still claimed on 1040.
c. Transferable Shares can be sold.
d. Capital Incentive can attract talented employees by offering stock options.
Disadvantages of corporations;
a. Formalities.
b. Multiple decision makers
c. Fees to operate and incorporate.