Sole Proprietorship
The type of a business that is owned and run by a single person and has no legal differentiation between the owner and the business is known as a sole proprietorship (Rogers, 2012). Examples of such a business are stalls owned by a family under the name of the household head.
Steps to form
It is the simplest and easiest form of business to create. The process involves registering the business with the local authority and paying for a business permit/license ( Williams, Barton, & Coltrain, 2000) . After acquiring a license the sole proprietor can set-up a business at any point.
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Personal liability for owners
The owner of the business is liable to all activities of the business exclusively. All the debts and liabilities of the business are to be paid by the business owner.
Advantages and disadvantages
A sole proprietorship form of business is advantageous in the sense that it is easy to register. The owner enjoys the profits and control over the enterprise. The business owner makes decisions regarding the business solely making it easy to take managerial decisions. The business is the boss meaning that they are not managed or controlled by others like in employment ( Spadaccini, 2007) . However, sole proprietorship has its own limitations. There lack a distinction between business and personal income. Business owner is liable for income tax and national insurance contributions. The business owner is responsible for any debts that are incurred by the business.
Partnership
According to Rogers (2012), partnership refers to a legal business agreement where two parties or more share profits and management responsibilities. There is a general and limited partnership in business.
Personal liability for owners
In general, partnership there exist unlimited liability when the business is facing debts. In a limited partnership, partners have limited liability just in case the business is facing debt challenges.
Taxation
In partnership, the business does not tax and instead, the tax is levied on the income of each partner ( Spadaccini, 2007) .
Advantages and disadvantages
In partnership, it becomes easy to pool resources. Partners come together with different capacities which include creativity and capital. It is easy for a team to pool resources together as each of the members has a different capacity. There exists a greater borrowing capacity. In partnership, it becomes easy to borrow resources. There are limited external regulations. There exists unlimited liability for the members in any case of business debts. In partnership, however, there is an increased danger of disagreements and friction among actions and partners. If a partner leaves or joins it is a must that all partnership assets are valued which might be expensive cost-wise ( Spadaccini, 2007) .
Forming an LLC
Limited liability companies refer to business where the owners are not legally responsible for the company’s debts and liabilities. In the process of forming an LLC the first step is to choose a name. Articles of organization which establish the powers rights, duties, liabilities and other duties of each of the member must be documented and filled with the necessary authority (Rogers, 2012). Documents in the articles of an organization also contain information such as LLC member name and addresses, names of LLC registered agents and statements of purpose in business.
Taxation
LLCs do not pay taxes. The profits and losses are passed through to the owners, who in return pay tax in their own returns.
Advantages
There is a limited personal principal liability. Choice of the tax regime in which LLC members make the decision on how they want to be taxed. The members choose to be taxed either as sole proprietors, partners or S or C type of corporation which offers flexibility. Compared to a corporation the LLC have Much less administrative paperwork and record-keeping. The disadvantages of LLC include it can be dissolved easily in the death or bankruptcy of a member. Complications when the main objective is to move the company into a publicly-traded company.
Corporation
A legal entity that is considered to be separate from its owners is identified as a corporation. Corporations have similar responsibilities and rights to that of individuals (Rogers, 2012). For example, a corporation can enter into a contract. Borrow money and loans. It can sue or be sued. It can also own assets, pay taxes, recruit or hire workers.
Steps to the creation of a corporation
To create a corporation one must choose a name as required by the corporation rules of the state. The next step is to appoint the initial corporation directors. Draft articles of incorporation as well as paying a filing fee. The board is supposed to create bylaws that explain the rules that guide the corporation. The board of directors is supposed to hold the first meeting in which the shareholders are issued with a stock certificate. The corporation should then obtain permits and licenses necessary to engage in business ( Williams, Barton, & Coltrain, 2000) .
Taxation
Double taxation is done to corporations. The profits of the corporation are taxed after they are earned. The corporation profits are shared among the shareholders as dividends. The dividends are taxed after reaching the shareholder's hand thus creating a double tax.
Advantages and disadvantages
The corporation is a separate entity from the owners meaning that the liability for incurred debts or judgement does not go to the shareholders. Corporations have the capacity to raise extra capital by selling the corporation’s shares. In addition, it is easy to transfer ownership by selling shares of stock. Corporations can continue to exist after the death of the shareholders meaning that there are perpetual lifetimes for the corporation. Disadvantages of the corporation are that there is double taxation for corporations. The process of creating corporations is complicated and costs more. Corporations also face increased oversight and regulation from the authorities ( Spadaccini, 2007) .
References
Rogers, S. (2012). Essentials of Business law.
Spadaccini, M. (2007). Business Structures: Forming a Corporation, LLC, Partnership, Or Sole Proprietorship . Entrepreneur Press.
Williams, C., Barton, D., & Coltrain, D. (2000). SELECTING A BUSINESS STRUCTURE An Informational Guide to Forming Businesses By.
