Legal forms of Business
The process of starting a business can be a challenging one. From choosing a business name, identifying the product to sell and where all require thoughtful decisions. All these decisions also need legal and practical considerations. To understand more about the different forms of business, it is important to consider the right structure for the business (Legal Forms, 2006).
Sole Proprietorship
A sole proprietorship simply means a business with one owner. With many forms of organizations out there, this is the most common. In a sole proprietorship, a business organization is not separate from its owner, just under a business name in which the owner represents him or herself to the public (Lee, 2011).
Scenario
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Owners of this business are known as members, not the stockholders or partners. It also limits a business owner’s liability (Nelson, 2008).
Scenario – A landlord who has many real estate holdings has the potential of huge liability if something happens to a tenant in one of his properties. For this type of business scenario a limited liability company may be the preferred option. This allows the owner to build their business while keeping their personal liabilities to a minimum.
S Corporation
S corporation is same as a corporate business with difference as how an owner can take the tax advantage. S corporate form of business allows its owners to be taxed like a partnership rather than corporate, even though the business is separate entity. Initially majority of businesses start as an S corporation to offset their losses on their income if any and can always revert to C Corporation when business begins to make taxable income (Lee, 2011)
Scenario – A person’s hobby can become a business option for many such as a freelance photographer. By incorporating his or her business into an S-Corporation, they are able to take advantage of the “pass-through” tax which allows all the profits of the business to pass through directly to the shareholders’ tax returns. Therefore their business does not need to pay taxes and the freelancer takes tax advantage by being the owner and employee of the company.
| It is impossible to add additional owners and to pass on business, business dies with owner. A single owner
A corporation is a separate legal entity that possesses distinctive liabilities and privileges than that of their members or shareholders. As an investor, a corporation’s advantage is liability for their own investments especially in risky investments (Kubasek, et al., 2012, p. 760). Among the various types of corporations for Betty to select from, an S corporation is an enticing venture for new entrepreneurs given that it grants limited personal liability for debts, sharing of corporate profits, and taxation relief. Double taxation is a main disadvantage of C corporations but not for S corporations. The General Corporation Law (Corp C §§100-2319) treats S corporations similarly to partnerships for taxation purposes.
The organizational forms a company might have as it evolves from a start-up to a major corporation are proprietorship, partnership, or corporation.
There are several different types of business ownership which are most commonly used in business’ and company’s today, these include; Co-operative which is a business owned by its employees, Partnership which is a business owned by between 2 and 20 people, Private limited which is a business owner by a small groups of people who have shares and a Public limited business is owned by private individuals by shares bought and sold on the stock market. A charity is a business with the purpose to help the public, the government is a business owned by the government and lastly a sole trader which is a business owned by only one person.
The organizational forms a company might have as it evolves from a start-up to a major corporation are: sole proprietorships, partnerships and corporations. The advantages of a sole proprietorship are that is is easily and inexpensively formed; is subject to few government regulations and it’s income is not
When you form a C corporation, you protect your personal assets. Anyone who sues your company can't go after you personally. You also can buy and sell stock. A corporation survives you, which means you can pass it on to your heirs. To form a C corporation, you must follow specific guidelines. If you file the correct papers, both the Internal Revenue Service and your state will recognize your company as a C corporation.
Control- The general partner(s) maintain control of the business. They have equal authority unless otherwise specified in a agreement. The limited partners do not maintain any control in the partnership.
• Income Taxes: S- Corporations are tax paying entity, the business files tax returns but not taxed on earnings. The stockholders claim losses or profits on their personal tax returns.
INCOME TAXES- S-corp differs from C-corp taxation; taxes are passed through to the shareholders only. The company itself does not pay taxes.
* Limited Liability - Unlike partnerships and sole proprietorships, corporate shareholders are not liable for any of the corporation's debts.
As a derivative of the C-corporation an S-corporation is subject to all of the same corporate formalities as the C-corporation and actually is not differentiated from the C-corporation under Texas law. This means that in Texas a corporation is founded without the designation of C or S because they are treated exactly the same inside the state. However, the difference between an S-corporation and a C-corporation under federal tax law is significant. The S-corporation is formed by making an election on IRS Form 2553 preventing taxation of profits at the corporate level (IRS, 2012b). The election to not be taxed at the corporate level by a corporation does not in any way effect the limited liability protections that the corporation has under Texas law. This exemption from corporate taxation does not mean that income is not taxed but rather that profits, credits, and deductions are automatically passed to stockholders of the corporation in the current year thereby eliminating any benefit accumulation of profits in the corporation. These pass through items are distributed to the shareholders based on the percent stock ownership of the business (Nitti, 2011).
The choice of legal status for setting up a new company can be complex and is dependant on various tax, commercial and legal considerations (Accountingweb, 2014).
Tinker & Tailor’s Home Security Service: “The limited partnership form of business organization was primarily created to address one of the worst shortcomings of the traditional partnership form: unlimited personal liability for financial obligations incurred by the partnership” (Seaquist, 2012). Those involved in a limited partnership are in a unique situation in that they are only legally responsible for their investment in the partnership
Limited partnership: Owners are distinguished as either general or limited partners. Limited partners are only liable about their contribution to the partnership involving funds, equipment and other property.
Numerous and varied laws regulate the activities of all businesses and everyone involved in business, from owner to manager to employee. Some major business law categories are as follows: