Analysis of sole proprietorship

Analysis of sole proprietorship

Analysis of sole proprietorship

A sole proprietorship is one of the most common types of business structure in the whole world. It is a form of business that is owned by a single person or a family. The owner of the business and the business have no differences or distinction in the eyes of the law as any mistake in the business can be repaid by the owner. For example, if one suffers a loss and bankruptcy, the personal properties can be taken to repay the debt of a business. All that is needed in the formation of the business is a license or a permit and then register the business with a local government. The simplicity and the fact that only a few requirements are needed makes the sole proprietorship very popular.

Due to the fact that a sole trader owns the business alone, they enjoy profits alone and when the loss comes they have no one to share with. In addition, a sole trader pays income tax returns for all the profit they gain in the business (Epstein, 2012). The main advantage is that the business is not taxed separately from the owner. A sole proprietor can avoid tax payment by utilizing pensions and paying family members as employees. Lastly, a sole proprietor can be dissolved is when the owner dies, the business is bankrupt, and if the owner becomes mad and unable to run the affairs of the business.

Analysis of Partnership

The partnership is a form of business that is formed by more than one person. The highest number of people allowed for partnership is 20. A partnership can be classified as; general partnership and limited partnership. In general partnership, all members or business owners share equal responsibility in terms of management of their business and all have unlimited liability. On the other hand, a limited liability is one where one or more partners in the business have a liability that is limited. When registering a partnership, there are certain requirements needed such as the business name, tax file number and partnership agreement, goods a services tax which is effective for a business that makes more than $75,000, and if the partnership would employee other people, it must account for their taxes.

Partners in a business are taxed a ‘pass through’ which means that it the people who are taxed and not the partnership. It is a good form of business because the members of the business entity are taxed according to the profit gained by each of them. This type of business can operate and reduce taxes via recording all the expenditures of the business (Weltman, 2016). In other words, partners in a partnership are not subject to the federal income tax. Tax reduction techniques for the partnership could be similar of those of a sole trader. However, a donation in terms of cash or assets can be used as tax deduction method because the IRS gives tax breaks for people donating assets.

Lastly, a partnership can be dissolved when the partners decide not to work together. Dissociation of a business can happen when a partner withdraws from the business. In addition, a partnership can be dissolved when one of the partners leaves the partnership by using a written notice. Further, if one or more partners is found to be legally unfit from running a business, court order or death of a partner are some of the reasons that can result to dissolvent of a partnership.

Analysis of Corporations

A corporation is a legal entity which is separate and distinct from the people who own them. Corporations are seen by the law as different entities from the people who run them. Thus, a corporation enjoys all the legal rights that a person enjoys such as entering into contracts, borrowing money, to sue people or be sued by others, and payment taxation among others. The owners of corporations have limited liability, meaning that they can enjoy dividends and profits but none can be responsible for the payment of business debts. In other words, is a corporation is bankrupt, then no personal assets can be seized on behalf of the business.

A corporation is created by a group of shareholders owning common stock. The shareholders must have similar objectives. The day-to-day operations of a corporation are conducted by a board of directors (Weltman, 2016). A person can be sued if they neglect their duties. It should be noted that corporations are owned by not less than 50 individuals but the highest number of shareholders can be infinity.

When corporations make a profit, they are expected to pay corporate income tax. On the other hand, the profit is distributed to shareholders who also pay taxes for their earnings. In this case, one notices that double taxation occurs in corporations. However, in this kind of business structure, taxes can be reduced by cutting down on salaries, advertising outlays, bonuses are given to members, and costs associated with medical and retirement plans for the employees.

Given the three different forms of business analyzed in this study, the one which would be advantageous financially is the partnership type of business. The reason for the financial benefits of the partnership is that only members are taxed a ‘pass through’ tax. Unlike proprietorship where all deductions are made on all the profit, the partnership enjoys reduced amounts of taxation. In addition, the partnership is better than a corporation because the business is not taxed.

 

References

Epstein, L. (2012). Bookkeeping kit for dummies. Hoboken: John Wiley & Sons.

Weltman, B. (2016). J.K. Lasser’s Small Business Taxes 2017: Your Complete Guide to a Better Bo. John Wiley & Sons.

 
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