Legal Forms of Business Sole Proprietorship Partnerships Corporations

Sole Proprietorship Business owned and operated by one person More sole proprietorships than any other business type

Strengths 1. Easy to start 2. Easy to manage 3. Owner gets the profits

4. No Business Income Taxes -Few complicated tax forms 5. Pride of Ownership 6. Easy to get out of business

Weaknesses 1.Unlimited Liability – Owner is completely responsible for debts 2.Difficult to raise money

3.Size and efficiency concerns - Are the resources available to reach the size necessary to run efficiently

4. Limited Management Experience – often entrepreneurs are inexperienced 5.Difficult to attract quality employees no 401k’s, benefits

Partnerships Business owned by 2 or more people –7% of all U.S. businesses

Types General Partnerships – All partners are equally responsible Limited Partnerships – At least one partner is not active in running the business (silent); has limited liability

How is one formed? Relatively Easy, but legal paperwork : Articles of Partnership or Partnership Agreement are needed Specifies profit/loss arrangement, responsibilities, how new partners might be added

STRENGTHS 1.Easy to establish 2.Ease of management – Spread out talents 3.Lack of special taxes 4.Can attract money easier than sole prop’s

5.Easier to achieve efficient size 6.Easier to attract better employment talent

Weaknesses 1.Each partner is fully responsible for acts for the others – Unlimited Liability Limited partners are only up to original investment

2.Limited Life- When one partner dies or quits the partnership is over 3.Conflicts between partners Different visions, goals, styles

Corporations Recognized by law as a separate legal entity –Just like an individual citizen –Can sue, be sued, own property, enter contracts, file own taxes

Formal and legal arrangement State approves a charter with: – name – # of shares – purpose

EasyEasy to raise money –Stocks can be sold publicly or privately –Bonds may also be sold CanCan hire best management

Limited Liability for ownersLimited Liability for owners –Stockholders are liable only for the amount they invest –Protects owners from direct lawsuits and bankruptcy

Unlimited LifeUnlimited Life –corp. continues to exist after ownership changes Easy to transfer ownership – just sell stocksEasy to transfer ownership – just sell stocks Anonymity – can hide your name Anonymity – can hide your name

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1.Corporations are difficult and expensive to start –Complex legal process 2.Owners often have little say operations

3. Double taxation –Corporations must pay income taxes –Owners must pay taxes on earnings & dividends

4. Corporations are subject to more regulations than other forms –Selling stock, chartering, finance info

LLC: Limited Liability Company operated similar to a sole proprietorship the liability protection of a corporation profits or losses are passed to the individual tax returns

LLC Pros: The owner of a single member LLC doesn't have to file a tax return for the LLC, as they only report the activity on their personal tax return. Ease of Set up: Most LLC forms are only a single page for single member LLCs. Inexpensive to Start: The cost of setting up an LLC is also inexpensive, usually just a couple hundred dollars. Guidelines: The red tape involved in forming an LLC isn't as stringent as that involved with S corps, which also leads to savings on accountant and attorney fees, among others.

LLC Cons: Self-employment Tax: Single Member LLC owners are required to pay self-employment tax on income generated in the LLC, which means making quarterly estimated payments to the IRS. Owners of LLCs must make sure they don't pierce the "corporate veil," meaning they have to operate the LLC separately from their personal affairs. "The LLC must not be a shell but an operating entity," says Eka. "There have been cases where a business owner lost their protection because there was no distinct difference between the LLC and its owner."

S Corp Pros: The key advantage of an S corp is that it offers tax benefits when it comes to excess profits, known as distributions. The S corp pays its employees a "reasonable" salary, which means it should be tied to industry norms, while also deducting payroll expenses like federal taxes and FICA. Then, any remaining profits from the company can be distributed to the owners as dividends, which are taxed at a lower rate than income.

Cons S corps have more strict guidelines than LLCs. Per the tax code, Eka says, you must meet the following standards to create an S corp: –Must be a U.S. citizen or resident –Cannot have more than 100 shareholders (a spouse is considered a separate shareholder for the purpose of this rule). –Corporation can only have one class of stock –Profits and losses must be distributed to the shareholders in proportion to the shareholder's interest. For example, you can't have disproportionate distributions of dividends or losses. If a shareholder owns 10 percent of the S corp, he or she must receive 10 percent of the profits or losses.

It costs more to form an S corp. Shareholders must adhere to the requirements at all times. If they don't, they risk disallowing the S corp election and the corporation would be treated as a C corp and its corresponding restrictions. Passive income limitation: You can't have more than 25 percent of gross receipts from passive activities, such as real estate investment. There can be additional state taxes for S corps. Shareholders should pay attention to paying themselves a "reasonable" salary for the work they perform for the S corp since the IRS is increasingly scrutinizing S corps for this.

LLC or S Corp business-incporporation/ business-incporporation/