Sole Proprietorship, Essay Example

Individual proprietorship is one of the most popular forms of an enterprise. Majority of companies exist in the form of sole proprietorship. This form of company imply only one owner, who is totally responsible for operations of his/her business (Moye, 2004, p.13)

1. This form of an enterprise has unlimited liability. The owner of the company is responsible for debts of his/her business. In case when the business has more debts than assets, proprietor will cover shortage with his/her own assets.
2. Income taxes. Income of the sole proprietorship is not a subject of taxation. Profit is taxed as an income of the proprietor.
3. Comparing with other forms of an enterprise, sole proprietorship has limited life-cycle. When the owner of the business dies, the business will be closed. Although, the proprietor can pass his/her ownership to relation, in most cases sole proprietorship stops its existence with the death of the founder. After death, business is treated as a part of the owner’s estate.
4. The owner of the business is responsible for all operations of the proprietorship. The founder is the CEO and the only investor of the company.
5. Profit retention. The whole amount, earned by sole proprietorship is at the owner’s disposal. There no commitments to share the profit with other parties.
6. Sole ownership is very easy to establish. Establishing of the individual proprietorship includes simple registration process and there are no fees to pay for its registration. This form of an enterprise also has no burdens as reporting requirements.
7. The main burden of the sole proprietorship is limited ability to expand. Sole proprietorship is not eligible to issue stocks or bonds. There are only to ways to finance business for the owner – to invest profit or take a loan from a bank. Loan will be given according to the owner’s creditworthiness. But these way cannot provide business with substantial funds (e.g. for capital investments).

General Partnership

General partnership is a form of an enterprise, which implies presence of two or more partners. These partners are the founders of the partnership.

1. General partnership has the same type of liability as sole proprietorship. All partners are responsible for business debts. In case of company’s bankruptcy, partners will be covering lack of assets with their own estate.
2. Income taxes. Like income of sole proprietorship, general partnerships’ income isn’t a subject to taxation. General partnership has only one level of taxation – income taxes are paid only by partners after they receive their share of profit. This share is equal regardless their contributions (if other is not stipulated in written). Losses are covered equally too (if other is not stipulated in written) (Moye E. 2004, p.42).
3. General proprietorship can live longer than sole proprietorship. When one of the partners leaves, partnership is dissolved and the partnership becomes a new legal entity.
4. All partners in a general partnership have full control of it. If other is not mentioned in written, all partners has equal number of votes even if they have made different contributions.
5. Profit retention. As it was mentioned above, all partners get equal shares of profit, even if their contributions neither were nor equal.
6. Taxation for general partnership depends on the state where the income was derived. General partnership should use Schedule R to apportion income between the states.
7. The main advantage of this form of an enterprise is low volume of paperwork needed for registration and its cheapness.
8. The main burden for a general partnership is the same as for a sole proprietorship. Besides the fact that number of contributors is more than one it is still quite hard to get additional funds at a low price.

Limited Partnership

Is a form of an enterprise, which has much in common with general partnership, but with several differences. It has two or more partners and have differences concerning their liability and taxation of income.

1. Liability is the first thing, which distinguishes general and limited partnerships. When founding a limited partnership, at least one of partners must have full liability (general partner), the other partners has limited liability – the are responsible for company debt only with their contribution.
2. Income taxes. An income of a limited ownership is not the subject to taxation. Income taxes are paid by partners after they receive their share of the profit. But in case when a partnership fails to meet several requirements concerning limited liability, centralized management, durability and ability to transfer ownership, income of the partnership becomes a subject to taxation like the income of a corporation.
3. A partnership is disallowed if any one of the general partners leaves the partnership, dies or is declared legally incompetent.
4. Control in limited ownership is performed by partners according to their liability. Only general partners have an ability to manage the company. Limited partners are not allowed to make any decisions concerning operation of the business – they are just investors. In case then limited partner takes decisions, he can be treated as a general partner.
5. Profit retention. As it was mentioned above, all partners get equal shares of profit, even if their contributions neither were nor equal.
6. According to the Schedule R, partnership should apportion its income and pay taxes according to the amount of income derived in each state.
7. As general partnership, limited partnership is easy to establish and doesn’t need serious expenditures. Another substantial advantage is ability to gather additional funds with new limited partners without loosing ability to manage the company.
8. The burden is inability of the company to operate if any one of the general partners leaves the partnership, dies or is declared legally incompetent.

C-Corporation

Is a legal form of business entity able to have unlimited number of stockholders (both residents and non-residents). Income of a C-corporation is a subject to corporate taxation.

1. Liability of company’s owners is limited. Shareholders, in case of corporate bankruptcy, lose only their contributions. When requirements of all creditors are satisfied and company still have assets, shareholders stakes can be returned partially or in a full.
2. Income taxes. C-corporation’s income is a subject to corporate taxation. After the corporate tax is subtracted, net income can be paid out to shareholders as dividends. When they receive their part of the corporate income, they are obliged to pay personal income tax. Thus, income of a corporation is a subject to “double taxation”.
3. The life period of C-corporation is unlimited. C-corporation can exist if it is able to make profit and cover all its debts. Shareholders death of intention to leave the company won’t lead to the dissolution of the company. Stakes in capital can be easily transferred to another party.
4. Usually company’s shareholders do not manage company’s business directly. They control the company, electing the board of directors, which has direct control on the company. But shareholder can still manage company directly if he/she was elected as a member of the board of directors.
5. Profit retention. Company’s net profit can be used in two ways: either it will be invested in business or it will be paid out in the form of dividends to stockholders. Each stockholder get amount of company’s profit according to his/her stake in company’s capital.
6. Location of company’s subsidiaries and branches doesn’t influence on the amount of paid taxes. Corporate tax is equal for all states.
7. The major advantage of the C-corporation is easiness to raise additional funds. It can make it just with an issue of stocks. Another advantage is company’s ability to operate even if stakeholders leave he company.
8. The main burden of corporation is “double taxation”, which takes substantial amount of profit from shareholders. The other disadvantage is complexity registration and its high costs.

S-Corporation

Is a form of an enterprise, which combines advantages of all types of business entities, mentioned above. Nevertheless, there are particular limitations on operation of companies, having this type of incorporation.

1. Like shareholders of C-corporation, shareholders of S-corporation have limited liability. In case of bankruptcy they lose only their shares.
2. Income taxes. Income of S-corporation is a subject to pass-through taxation. Company doesn’t pay taxes, they are paid only by shareholders.
3. Like C-corporation, S-corporation life period of is unlimited. Any changes in the amount of shareholders cannot influence company’s operations.
4. The company is managed by the board of directors like in C-corporation. But in S-corporation shareholders have more influence on their company. According to the rules, stockholders are obliged to organize corporate meetings.
5. Profit retention. Retention of the profit is performed like in a C-corporation.
6. The business must be a domestic company in any state (Zahorsky, D. 2009. About.com)
7. Compliance . The S-corporation is exceptionally convenient for the starting businesses, as it allows pass-through taxation, but also limits the liability of the shareholders. Nevertheless, an S-corporation is not as easy to organize, as extra paperwork is required. Some limitations are also present: S-corporation can issue only one class of stock; number of shareholders must not exceed 75 persons; only individuals, certain trust and estates can be shareholders; all shareholder must have American residence. Moreover, the shareholders’ meetings are required, which is often problematic (Qovax.com blog, 2008).

Limited Liability Company

Is a type of an enterprise, which provides its owners with limited liability. Capital of LLC is formed with members’ contributions. Each members owns amount of members units (shares) according to his/her contribution.

1. Owners of a LLC have the liability protection of a corporation. A LLC exists as a separate entity much like a corporation. Members cannot be held personally liable for debts unless they have signed a personal guarantee (Zahorsky, D. 2009. About.com)
2. Income taxes. Income of a Limited Liability Company is a subject to pass through taxation – company doesn’t pay income taxes. Income taxes are paid by members as their personal taxes.
3. Life of the company is determined by availability of a member, who owns 50% of the LLC or more. If this member will decide to leave the company, LLC will be dissolved. If LLC loses member, who have less than 50% won’t influence company’ operation.
4. There are two types of LLCs, which differ by the type of control: Member-Managed LLC and Manager-Managed LLC. According to the name of each type, the first LLC is managed by its members or their fiduciaries; the second is managed by a hired manager. Second type is used when member what to save investor status and do not want to manager the business (Moye, 2004 p.126)
5. Profit retention. Profit of a LLC is divided among members according to their stake (number of member units).
6. Generally, a LLC registered in one state can operate in the other ones as well, though some additional paperwork may need to be filed. While operating in different states, LLC might be influenced by local taxes, like the franchise tax. Moreover, some states do not allow some businesses to be formed like LCCs.
7. Compliance Limited liability companies can select varying forms of distribution of profits. Unlike a common partnership where the split is 50-50, LLC have much more flexibility. The LLC business structure requires no corporate minutes or resolutions and is easier to operate. (Zahorsky, D. 2009. About.com). LLC is dissolved when a member dies or undergoes bankruptcy. Running a sole-proprietorship or partnership will have less paperwork and complexity. A LLC may federally be classified as a sole-proprietorship, partnership, or corporation for tax purposes. Classification can be selected or a default may apply.

Summary

Considering the given situation, S-corporation seems to be the most appropriate form of business organization. To begin with, it allows acquiring additional resources. In order to expand, significant capital investments will be needed. These funds are not likely to be acquired form a single person, as a number of investors might be needed.

Simple Corporation may be a solution, but these are a subject to double taxation, will definitely decrease the profits substantially. S-corporation limits the number of shareholders to 75, but still allows shares emission, which is the most efficient way to raise funds for the expansion. Liability is also suitable: S-corporations have limited liability, which means that the owner is not responsible with all of his possession, but only the amount invested. Depending on the amount of shares issued, the initial owner of the company can still have enough control of the entire operations if he chooses to stay in business. 50% +1 share is a critical package which allows taking the most important strategic decisions. In case of the S-corporation, 29% of the shares can be dispersed among the regular shareholders, while the original creator of the enterprise can hold the majority stock. Expansion to other states is also exceptionally convenient, as the depending on the income that is expected to be derived, the company can choose the state with the lower taxation rate.

S-corporation has some imperfections and inconveniences, such as: the number of shareholders is limited to 75, they must be of American origin, and no companies or funds can be shareholders. However, for the medium-size businesses it is an ideal solution, as the great combination of liability and taxation is maintained.

References

Moye  J. E. (2004). The Law of Business Organizations. Cengage Learning.

Zahorsky, D. 2000. Should Your Small Business Become an S Corporation? Retrieved July 24, 2009 from About.com website: http://sbinformation.about.com/od/ownership1/a/SCorporation.htm

Zahorsky, D. 2000. Limited Liability Company 101. Retrieved July 24, 2009 from About.com website: http://sbinformation.about.com/cs/ownership1/a/LLC.htm

Qovax.com Why I Chose S Corp Over LLC (Part 4): Compliance Requirements.    Retrieved August 2, 2009, from Qovax.com website:    http://blog.qovax.com/2008/07/03/why-i-chose-s-corp-over-llc-part-3-compliance-requirements/

California Tax Service, Limited Partnerships. Retrieved July 24, 2009, from California taxes Website: http://www.taxes.ca.gov/Income_Tax/limitedpartbus.shtml

California Tax Service, S Corporations.. Retrieved July 24, 2009, from California taxes Website: http://www.taxes.ca.gov/Income_Tax/limitedpartbus.shtml