Business Types
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SOLE PROPRIETORSHIP: A business ran, managed and controlled solely by the owner; all goods and services are provided by an individual. The owner determines the specifics of the business independently and the business is identified as an extension of the individual. This extension includes taxes paid, property owned, credit loaned and overall existence of the business. This type of business is the most common in the United States and includes the following advantages/disadvantages:
LIABILITY – The business owner is liable for all business debts and obligations as personal debt/obligations. If the business fails or is sued the owner is personally liable and responsible. The owners personal assets, secondary income and future income are available to creditors to settle any and all debts.
INCOME TAXES – This type of business is not independent of the owner, therefore not independently subject to taxes. However, the owner is taxed on profits from the business as income at a personal tax rate. This pass-through taxation allows the owner to utilize business deductions when filing taxes with the IRS.
LONGEVITY/CONTINUITY OF THE ORGANIZATION – In a proprietorship, the business is an extension of the owner. If the owner ceases to do business or becomes deceased, the business usually ceases to exist without any future revenue.
CONTROL – The owner determines independently the direction of the business; expansion or contractual prowess. The owner decides the limit of authority entrusted to others since the owner alone is responsible for the business.
PROFIT RETENTION – The business profit is kept with the owner as personal profit/income, allowing a higher rate of return on investment. There is no requirement to share profits with any other person or entity.
LOCATION – Sole proprietorships, in general are not required to file with the state to do business in that state. However, depending on the type of business, the owner may still need permits and/or licenses. As any other type of business, owners that have employees or file federal tax returns with the IRS need to request a federal employer identification number. The expansion of the business is only limited to the ability of the owner to manage the business; whether its locally, nationally or globally.
CONVENIENCE/BURDEN – Sole proprietorships are the easiest type of business to form, the most convenient to relocate/expand and the least amount of requirements to operate as a business. However, the ability to raise capital is limited to management of cash flow versus debt, limiting growth beyond personal wealth. This type of business is based solely on the owner and the owners ability to effectively operate the business.
GENERAL PARTNERSHIP: A partnership is when two or more individuals or businesses agree to conduct business together; this agreement may be verbal or written. In a general partnership all partners contribute property, capital, expertise and the expectation of shared profits. The advantages/disadvantages of a general partnership are:
LIABILITY – In a general partnership, all partners share unlimited liability for decisions made in the interest of the partnership. All partners are equally and personally liable for any business contract entered into, as well as the negligence of any partner. Like sole proprietors, general partners risk the loss of personal future income and personal assets due to failure of the business.
INCOME TAXES – Businesses operated as a general partnership are not identified as a separate entity to that of the partners. Therefore, the partners are taxed according to their separate portions of the business as personal income. The benefit of the pass-through taxation is it enables the partners to deduct their portion of business assets as personal.
LONGEVITY/CONTINUITY OF THE ORGANIZATION – General partnerships will dissolve automatically when a partner either decides to leave the partnership or dies. When partnerships dissolve, the business debts must be cleared and any remaining assets will be equally dispersed to the remaining partner(s). Another partnership may then be initiated if there were more than one remaining partner or with other individuals, usually without much interruption of the business.
CONTROL – Individuals in partnerships lose the ability to make business decisions independently. All major decisions for the business need to be agreed upon by all the partners.
PROFIT RETENTION – In a general partnership, all profits and assets are shared equally with all the partners. The initial investment rate of return is determined by the success and size of the business, although sharing profits may slow that rate to the individual.
LOCATION – Like most small businesses the location of the business is usually the location of the business owners. However if the partners elect to relocate, they are required to complete all business at that location and file any required paperwork at the new location before they can operate at the new location. If the partners elect to expand they are only limited by the ability to manage the partnership at that new location. Some businesses that want to expand may see entering into a general partnership with another business and agree to share the profit, the easiest way to do so.
CONVENIENCE/BURDEN – With a general partnership all the responsibilities of the day to day operation of the business are shared equally with all the partners. Since there are no additional mandated reporting requirements other than annual taxes, the partners can focus on business growth.
LIMITED PARTNERSHIP: A limited partnership is a partnership where one or more partners are not actively involved in the operation of the business. These partners only invest financially in the business and share profits of the business. The advantages/disadvantages of a limited partnership are:
LIABILITY – In a limited partnership, the partners that are involved in the operation of the business hold the majority of the liability. The limited partner, as long as they do not become involved in the operation of the business, is only liable for their initial investment into the business. They can not be held liable for the actions or contracts enter into by the other partners.
INCOME TAXES – Limited partnerships can be used to limit the tax liability of the limited partner. Where a general partner will be taxed with the business profits and losses being taxed at a personal tax rate, a limited partner is sheltered from paying taxes on profits due to their involvement in the business. However a limited partner may offset their personal income tax with the business losses, if any.
LONGEVITY/CONTINUITY OF THE ORGANIZATION – Since