Legal forms of business

INTRODUCTION

If you have decided to start a business, or if you have already started one, it is important to decide what legal form of business will work best for you. There are three main forms of business to choose from. These are sole proprietorships, partnerships, and corporations. If you are going to start a business alone, you can choose between a sole proprietorship or a corporation. If you are going to start a business with at least one other person, yyou can choose between a partnership or a corporation.

There are important legal differences between the three forms of business. For example, both sole proprietors and the partners of a partnership are not considered legally separate from the business. The owners are personally responsible for every aspect of the business, and any profit or loss must be included on the personal income tax return of each business owner. In comparison, a corporation is considered legally separate from its owners. The owners oof a corporation do not usually have personal liability for the debts of the business or for any lawsuits that arise and the corporation is taxed separately from its owners.

There are many factors to consider when choosing the legal form tthat is best for your business. As a business grows, the advantages of the corporate business form usually outweigh the disadvantages. A lawyer can help you determine which form of business is best for your situation. In this jobI want to tell more about the adventages and disvantages of the different legal forms of business.

SOLE PROPRIETORSHIPS

A Sole proprietorship is a business that is owned by one person. It is simplest type of business to start. There are several important features of a sole proprietorship. First, the business and the owner are consider to be one entity under the law. Second, all of the assets of business are personally owned by the sole proprietor. Third, the sole proprietor is not considered aan employee of business. Because of this, the sole proprietor is not eligible for employment insurance if the business fails. The sole proprietor is not paid a salary, but instead can take money from the business throught personal drawings.

One of the advantages of being a sole proprietor is that you can be your own boss. You can make business decisions without having to ask anyone else. You also get to keep the profits from the business and you have the ffreedom to end your business whenever you want. A sole proprietorship is the easiest form of business to start. And, although you need to keep separate accounting records for the business, you only need to file tax return.

Owning a sole proprietorship also has disadvantages. The owner is personally responsible for all aspects of the business.If the business is being sued, so is the business owner. If the business owes money, the business owner is responsible for the debt, and the owner may have to use personal assets to pay. If the owner can not pay the debts of the business, he or she may have to claim personal bankruptcy. The only way to transfer ownership of a sole proprietorship is to sell the entire business to someone else.Otherwise, the life of business ends when the proprietor dies.

PARTNERSHIP

A Partnership is an unincorporated business that is carried on by two or more people who intend to share the business profits. Partnerships have at least five important features. First, a partnership can be created by an express agreement or it can be created if the people are simply acting in a way that seems like a partnership. Second, the partners can be held rresponsible for the actions and business debts of the others partners. Third, all the assets of the business are personally owned by the partners. Fourth, there are two main types of partnerships: general partnership, where all the partners share the profits and losses of the business: limited partnerships, where the limited partners are not involved in the daily operations and are only responsible for losses up to the amount they contributed to the business. Fith, partners are not eligible for employment insurance if the business fails. Partners are not paid a salary, but they can take money from the business throught personal drawings.

It is a good idea to put partnership agreement in place because it will outline issues such as how the profits or losses will be devided among the parners, and it will describe any limits to the legal responsibility of the partners.

Being a partner in apartnership has several advantages and disvantages, including important tax implications.

There are three main advantages to forming a partnership.

First, a partnership allows two or more people to work together and bring different skills and resources to the business. Second, a partnership is fairly easy to establich. The actual registration of the partnership is nnot expencieve or complicated. Howewer, it is good idea to decide how the partnership will be run and put into a partnership agreement. Third, if the partnership suffers a loss but the partners have others employment income, the loss can be used to reduce theis taxable income, therebly lowering the income tax payable by The partner.

There are five main disadvantages to forming a partnership. First, because the partnership is not considered to be separate fromits owners, the partners are personally responsible for labilities of the partnership. If the business fails, the partners will be personally responsible to pay all the debts and obligations of the partnership. Second, because each partner is an agent for the business and for the other partners, each partner is personally responsible for the actions of the other partners. If one of the partners makes a bad business decision, or acts negligently which results in the partnership owing a debt, all of the other partners are personally responsible to pay it back.Third, because a partnership is based on the individual partners, and it is not a separate legal entity, if one of the partners dies, the partnership ends. This means that the remaining partners have to

re-establish the partnership.Fourth, because a partnership is not a separate legal entity, it is difficult to buy or sell a partnership interest. Buying or selling a partnership interest will involve rewriting the partnership agreement and determining exactly how the partnership will change.Fifth, although the resolution of disagreements amongst partners is generally covered under a partnership agreement or case law, it usually is very difficult. There is no Act that exists which sets out rules for settling partnership disputes. If the ddisagreements are not resolved by the partners themselves, they will usually have to turn to outside help which can be time consuming and costly.

CORPORATIONS

Corporations are one of the three main forms of business. The other two main forms of business are sole proprietorships and partnerships. The main feature that makes corporations different from sole proprietorships and partnerships is that corporations are legal entities separate from their owners. As a result, the corporation is responsible for its own debts, assets, and llawsuits. The legal responsibility of the shareholders, directors, officers and employees of the corporation is limited, which means that, with few exceptions, these people cannot be held personally responsible for the debts and obligations of the corporation. This is the rreason that one of the words Limited, Incorporated, Corporation, or one of their abbreviations must be included in the full legal name of the corporation. These words give notice to the public that the business is a corporation and therefore its owners, directors, officers and employees have limited liability.

There are many advantages to incorporating a business. First, there is the advantage of limited personal liability for the people who own and run the corporation. This means that the shareholders of the corporation cannot be held responsible for the debts and obligations of the corporation unless they provided a personal guarantee. By comparison, in a sole proprietorship or a partnership, the owner or partner is personally liable for all of tthe obligations of the business. This means that the owner’s personal assets, including their home, car, and personal savings can be taken to pay for the debts of the business.Second, a corporation has an unlimited life. Because the corporation is a separate legal entity, the corporation will continue to exist even if the shareholders die or leave the business, or if the ownership of the business changes.Third, the corporate form of business makes it easier for a business to grow aand expand. Through the issuance of shares, corporations may be able to access the money they will need for expansion. This makes the corporate form of business more suitable for large business ventures than sole proprietorships or partnerships.Fourth, there may be tax advantages to running your business as a corporation. Examples of corporate tax advantages are tax deferral strategies and income splitting. Corporate taxation is a complicated matter and it is important that you talk to an accountant or a tax lawyer to determine which tax advantages apply to your situation and how best to structure your business.Finally, a corporation may appear more stable and sophisticated to the public. This may help you acquire new business.

There are also disadvantages to incorporating a business. First, you will have to file two tax returns, one for the business and one for your personal income. Unlike sole proprietorships and partnerships, any losses from the corporation cannot be deducted from the personal income of the owner.Second, the registration and set up fees for a corporation are higher than the set up fees for a sole proprietorship or a partnership. Incorporating a business is also a more complicated process than starting a sole proprietorship or ppartnership. You should contact a lawyer to help you incorporate your business.Third, the Government requires corporations to maintain proper corporate records, called a minute book. A minute book contains the corporate bylaws and minutes from annual meetings.To determine whether you should incorporate your business, you should consult a lawyer who can help you evaluate your specific situation.

Three legal forms of business

Descriptions and Adnvantages

Soles proprietorship Partnership Corporation

Ownership By a single individual By two or more persons By unlimited number of shareholders

Management Entirely in hands of owner By general partners Corporation’s board of directors

Life Will terminate with death or disability of owner Generally for a specific, agreed-upon term. Partnership may be terminated by death,withdrawal,insolvency, or legal disability of a general partner Unlimited unless by state law or charter

Liability Owner liability unlimited. Personal property can be attached by creditors to settle business debts. Unlimited for general partners. General partners are jointly and severallly liable for abligations of pertnership. Limited partner’s liability limited to amount invested Shareho;ders liability limited to their investment to corporation stock.

Taxation Owner taxed on business profits whether or not distributed Partners taxed or share partnership income whether or not distributed Corporation taxed on taxable income, whether or not distributed to shareholders

Advantages Uncomplicated – easy of informationGreater flexibility of actionSingleness of controlEconomy of operationsTax advantage by avoiding corporate income ttaxMaximum centralized authory Division of responsibilitiesEase of formationGreater flexibility of actionIncreased sources of capitalIncentive to key employeesTax advantage by avoiding corporate income tax Legal entity separate from individualsLimited personal liabilityContinuity of managementContinuity of existenceEasier to raise capitalIncentive to key employessReadily transferable interestsPossible seperation of ownership and management.

Disadvantages Unlimited personal liabilityLegal life ends with owner’s deathDifficulty in raising capitalPossible personel dificultiesOwner’s salary cannot be treated as axpense, hence, not tax deductible Unlimited personal liabilityImpermanence of existenceDivision of control/authorityDifficult to find compatible partnersDifficuly to raise additional capitalOwners salary/wage can not be treated as expense, hence, not tax deductible Difficult costly formationSubject to close government regulationScope limited by corporate charter Inflexibility of operationsDouble taxation by paying both corporate and personal income taxes