Different Types of Business Formation - Essay Example

Business Formation BUSINESS FORMATION Sole proprietorship is the commonest and simplest business formation, specifically because it can be operatedindividually and is also incorporated. Some of the advantages of sole proprietorship include its low start-up cost requirements, the chance for the owner to keep all the profits, and ease of formation (Spadaccini, 2013). However, it also has several disadvantages including limited ability to raise required capital, unlimited liability for debt, and its taxation as a single entity.

Whereas sole proprietorship has tax benefits as one does not have to file separate business tax reports and businesses are taxed at personal income rates rather than corporate tax rates, there is a disadvantage in that sole proprietors are required to pay self-employment taxes (Spadaccini, 2013). Another disadvantage is that the sole proprietor is held directly liable for debts, losses, and business violations. Partnerships involve shared formation and ownership of a business by more than one individual.

This business formation has several advantages, including more diverse sources of capital than sole proprietorship, ease of formation and management, and the sharing of responsibilities and combination of the partners’ complimentary skills (Spadaccini, 2013). However, partnerships also have disadvantages such as sharing of profits compared to sole proprietorship, unlimited liability, and taxation of partners as single entities in individual profit share. In the latter case, the partners are required to file tax reports on their share of the profits in individual income tax returns.

In addition, partners are legally inseparable from the business and are therefore personally liable for the business’ obligations and can be pursued personally by creditors; while partners are also legally and personally liable for transactions made by one partner (Spadaccini, 2013). Corporations are owned by shareholders as independent legal entities. They have several advantages including the business’ ability to raise more capital via share offers, limited shareholder liability for business-incurred debts, and the ability to continue operations if the original owners leave the business (Mancuso, 2015).

The corporation’s creditors cannot acquire the shareholders’ personal assets due to this limited liability, with shareholders only losing their investment in the business in form of the corporation’s assets. However, this form of business has several disadvantages such as increased costs due to additional requirements of paperwork and registration fees compared to the other business formations, as well as double taxation (Mancuso, 2015). In this case, corporations have to pay income taxes on their profits instead of on their personal taxes, while also paying taxes on the dividends paid out to its shareholders.

Finally, limited liability companies blend the characteristics of partnership and corporation forms of business. Their major advantages are the absence of restrictions ownership, reduced corporate formalities, limited liability, and flexibility in the business’ taxation (Mancuso, 2015). The owners are not personally liable for business claims and debts, especially since the owners only lose their investment in the business. Moreover, the limited liability company is not considered as a separate taxation entity and the business is not taxed with these taxes passed on to the LLC owners and reported through their personal income tax returns.

However, the limited liability company form of business also has several disadvantages such as fewer fringe benefits as compared to the other forms of business, costlier fees of formation, and more government regulations than sole proprietorship and partnership forms of business (Mancuso, 2015). References Mancuso, A. (2015). LLC or corporation? How to choose the right form for your business. Berkeley: Nolo Spadaccini, M. (2013). Business structures. Irvine, CA: Entrepreneur Press.