Discussion question: Identify the main types of business entities, and discuss the advantages and disadvantages of each. Your active participation in this discussion is essential to improving your understanding of the advantages and disadvantages of the various business entities.
First classmates response
Sole Proprietorship is when the owner has total control and unlimited personal liability. Profits are taxed directly as income to the sole proprietor. (Kubasek P. 771)
The Advantages of a Sole Proprietorship are, a sole proprietor has complete control and decision-making power over the business. Sale or transfer can take place at the discretion of the sole proprietor. No corporate tax payments. Minimal legal costs to forming a sole proprietorship and few formal business requirements.
The Disadvantages of a Sole Proprietorship are, the sole proprietor of the business can be held personally liable for the debts and obligations of the business. Additionally, this risk extends to any liabilities incurred as a result of acts committed by employees of the company. All responsibilities and business decisions fall on the shoulders of the sole proprietor. Investors won’t usually invest in sole proprietorships.
General Partnership- For most purposes, the partnership is not a legal entity, and each partner has equal control and unlimited liability, with profits that are taxed as income for partners. (Kubasek P. 772)
The advantages of a General Partnership are, businesses as partnerships do not have to pay income tax; each partner files the profits or losses of the business on his or her own personal income tax return. This way the business does not get taxed separately. Partnerships are easy to establish. There is an increased ability to raise funds when there is more than one owner. Wider pool of knowledge, skills, and contacts and improved management with more than one owner.
The disadvantages of a General Partnership are, partners are jointly and severally liable for the actions of other partnership obligations including contracts, torts, and breaches of trust. Joint and several liability means that if a third party were to sue the partners, the third party can sue any one of the partners without suing all of them. If a partner has been sued but cannot pay the third party the full amount, the third party may collect the money from the remaining partners. Each partner is individually liable for the debts and obligations of the business; if the business does not have enough assets to pay back business debts, creditors can take the personal assets of the partners. A partner cannot transfer interest in the business without the unanimous consent of the partners. Partnerships can potentially be unstable because of the danger of dissolution if one partner wants to withdrawal from the business or dies.
A corporation is a separate legal entity wherein the owners’ liability is limited to the amount of their contributions and the profits are taxed as income to the corporation.(Kubasek P. 775)
Some advantages are, There is a pooling of capital from many investors and it is therefore easier to get the business up and running. Shareholders are not personally liable for the debts of the corporation. If the corporation fails, shareholders may lose their investments in the corporation, but are not personally responsible for the corporation’s debts.
The disadvantages are, double taxation. The profits of the corporation are taxed as they are earned at a corporate level, and the profit is also taxed to the shareholders when it is distributed out as dividends. Shareholders that control and own a significant amount, or majority, of the corporation’s voting stock have a dominant voice in the management of the business in comparison to shareholders that do not own as much stock.
Limited Liability Company- An LLC is an unincorporated form of business organization that combines the tax advantages and management flexibility of a partnership with the limited liability of a corporation. (Kubasek P. 776)
Some advantages of an LLC are, profits pass through the LLC and taxes are paid personally by the members (owners) of the company. Liability of the members is limited to the amount of their investments. Members are allowed to participate fully in management of the company. Corporations and partnerships can be LLC members. No limit on the number of members for a LLC. A LLC can have just one member. Offers a large amount of flexibility; members decide how to operate various business aspects through the operating agreement. A disadvantage is increased complexity in business formation; a LLC may be classified as a sole-proprietorship, a partnership, or a corporation for tax purposes.
Kubasek, N., Browne, M., Herron, D., Giampetro-Meyer, A., Barkacs, L., and Williamsons, C. (2013) Dynamic Bus Law 2nd Edition
Advantages and Disadvantages of Different Business Entities. (2012, July 09). Retrieved June 16, 2017, from https://jux.law/advantages-and-disadvantages-of-bu…
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Second classmates response to discussion question
The first option to a business owner is sole proprietorship, this allows them to be in control due to them being the only person onboard. Usually chosen by a public figure or someone not wanting to expand their company and sticking to a small customer base. The upside is you’re not taxed to death and your company is legal. The downside is everything is set on your name so if anything happens the government is looking at you!
Secondary option would be a partnership. This isn’t really considered legal but it’s acceptable tax wise. This is usually an adventure that has a couple or several others involved, most likely a hedge fund team. But if something goes wrong then all parties are held liable and most come to terms on resolving it. If things go well then the income would be taxed under the individuals personal taxes.
Third option would be a corporation! This is a separate entity from the owners. Meaning the income is in its own tax bracket and is based off your shares within the company. If something goes wrong then you don’t come out of pocket but you can sell things within the companies holdings instead. The downside is once you build something amazing someone can come along and toss you out if they can gain control of the most shares or force a coup.
The fourth and last option would be a LLC. Limited liability corporation, meaning you are given a ton of breaks when choosing this option. Most small businesses choose this due to the advantages of being a corporation but not being taxed as one. The downside is you don’t get every benifit that a corporation would recieve, although it does seem like it. This is a great option for a company that plans on expanding. All of these options are great for a company but you have to decide on what’s best for you!
