Business Structures

September 19, 2018 | Filed under: Business, Internet, Real Estate

Sole Proprietorship

A sole proprietorship is owned by an individual. Generally there is no need to file legal papers and all income is reported to the IRS on Schedule C of the individual’s 1040. The owner is personally responsible for the organization.

Advantages Disadvantages
  • Minimal legal and filing fees.
  • Owner has direct control of company.
  • Owner retains profits/loss at personal tax rates.
  • Small capital requirements.
  • Easy to start. Just begin.
  • Limited regulation.
  • Creditors can go after you personally.
  • Perhaps there is a need to file a fictitious name.
  • Difficulty in growing the business by raising capital.
  • Maximum liability. Owner is personally responsible.

Partnership

Partnerships are created when two or more individuals join to create a business. Partnerships can be very challenging and often result in major legal hassles. The key reason is the fact that each partner is responsible for the actions of the other partners. If one partner makes a commitment for the partnership and then disappears, all the partners will be at risk. Each partner is personally liable for the debts and obligation of the group.

Advantages Disadvantages
  • Low legal and filing fills.
  • Shared controls of the company, therefore, help in company management.
  • Profits/losses are taxed at individual tax rates.
  • Minimal capital requirements.
  • Partnerships can be for a specific period of time or continue indefinitely.
  • Creditors can go after you personally and you are responsible for the liabilities of the other partners’ commitments.
  • Perhaps there is a need to file a fictitious name.
  • Perhaps difficulty in raising new capital.         Depends on the complexity of the partnership.
  • Tremendous liability. Yours and the other partners.
  • Greater reporting requirements. (e.g., providing K-1 tax documents to partners)
  • Greater cost of set up. A partnership agreement can cost $300-$2,000 to be prepared by a lawyer.

Limited Partnership

 Limited partnerships are often used in real estate syndications, but can be used in business. Usually, the “general” partner runs the business operation, while the limited partners are “silent” investors. Investors are “limited” to their personal liability/investment. All they can lose is the amount of money invested. They are not liable for the other partners’ obligations. You have limited liability and can benefit from the profit or loss of the company. In addition, the limited partners may have special tax considerations due to the way the IRS looks at the partnership. Consult your accountant and/or lawyer prior to getting involved in a limited partnership.

 

C Corporation

Corporations are separate legal entities. The benefits of a corporation are reduced personal liability and minimal personal risk. The corporation has a life of its own and, therefore, can enter into agreements, contracts, debts and obligations. Shareholders of the corporation can share in the profits with limited risk.

Advantages Disadvantages
  • Shareholder is not responsible for the debts of the company. Limited liability.
  • Easy transfer of ownership. Sale of shares in the company.
  • Easier growth. Sell shares, raise capital.
  • The company existence is more stable.
  • Ownership can be widely distributed; therefore the potential for a lack of direct control exists.

PS: Seek Legal and Tax Advice when setting up a Business Structure.

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