Follow Ken's advice.
I teach a Small Business course at Southern Connecticut State University. My students are required to research and write about the different business forms. Here is some information that you may find helpful, but again, talk to your attorney and your accountant
Dan
BUSINESS FORMS:
1. Sole Proprietorship: A sole proprietorship is a business that is owned and operated by one person (Hatten, 2009).
Advantages:
As a sole proprietor of a company there are many advantages that a proprietor has being the sole owner of their company. Some advantages include independence; this means that the sole proprietor has complete control of the company and the operations and decisions that it makes. The sole proprietor also has control over their company’s location, money, as well as employees. In a sole proprietorship you are the head of the company and do not need to consult partners, stockholders or a board of directors to make difference in your company. A sole proprietorship is also easy to set up and get started; there are less legal requirements as well as restrictions that would increase in a partnership or corporation. As well as the corporation being easy to start it is also easier to close, you are able to liquidate your assets and back out of the company without complications (Hatten, 2009). There are also tax benefits in a sole proprietorship which allows for you to deduct losses from your company out of any other income you have made for the year (Hatten, 2009). The sole proprietorship also allows you to put your own skills and abilities to work in the best way possible and in the right area of your company. A sole proprietorship allows for sole proprietors to have the lifestyle and location they want while being in charge of their own assets.
Disadvantages:
As a sole proprietor there are also some disadvantages to owning your own company. The disadvantages include unlimited liability which means that a sole proprietor is personally liable for all debts incurred by the company (Hatten, 2009). Personal assets such as a sole proprietor’s car and home may have to be liquidated for any debts from their business. Another disadvantage also includes limited resources, this means that because you are only one person you have fewer financial resources then a group of people would be able to collect (Hatten, 2009). There are also limited skills coming into a company, as one person you are only capable of so much and lack all skills needed to run an entire business. This also means because you are only one person there is a lack of continuity in the business, meaning if you get sick or die the business has the potential to cease to exist.
2. Partnership- A partnership is an association of two or more people existing as co-owners of a business for profit. Two people work as a team with their own set of skills in order to bring together a company and gain assets (Hatten, 2009).
Advantages:
As partners of a company there are many advantages for having two people put their skills and assets together to create a business. The first advantage is pooled talent, this means that though you are a valuable asset for your individual skills, having two different sets of skills and perspectives give the company a greater advantage. Partners also have the ability to pool their resources together, meaning they are able to put together additional capital in order to gain more assets for their company. Partnerships are also easy to form, credit is easier to gain in a partnership between a couple to a few people and there is also more experience and expertise in decision making as well (Hatten, 2009). Partnerships also have tax benefits which include partners being taxed as individuals, and profits are taxed only once on each partner’s share of the income (Hatten, 2009). Partnerships hold many advantages when pooling many talents and skills into one company with prior experience as well as assets.
Disadvantages:
As a partnership there can also be many disadvantages to having multiple partners come in on one company. The first disadvantage is that there is unlimited liability, this means that each person in not only limited to the amount of his or her investment but to their partner’s personal property as well, each partner is responsible for 100 percent of all liability for the company (Hatten, 2009). In a partnership there is also a potential for management conflict, future decisions of the company are always at risk as well as conflict of who thinks what is best for the company. There is also the disadvantage of having less independence compared to proprietorships, in a partnership you have to share all decision making and information with partners and can no longer only have your opinion and advice on what the company should do and where it should go. Continuity can also be a problem with a partnership, when a partner dies or backs out of the company, the decision of giving the piece to a family member or selling it to the other partners of the company comes into question (Hatten, 2009). A partnership runs the risk of conflict of interest and managerial arguing over what is best for the company.
4. Sub “S” Corporation: A Sub Corporation is a corporation in which the owners are taxed as partners rather than the corporation being taxed twice (Hatten, 2009).
Advantages:
The S Corporation is able to provide you with the limited liability protection of a corporation while allowing the tax advantages of a partnership (Hatten, 2009). An S Corporation allows for a corporation to avoid double taxation by letting you offset your losses of the business against your personal income tax (Hatten, 2009). Also with an S Corporation income and expenses go to the shareholder’s in proportion to the number of shares they own and they are taxed at their individual income tax rate (Hatten, 2009).
Disadvantages:
An S Corporation can also be disadvantaged because there are many requirements to meet in order to become a Sub Corporation. The first disadvantage is that all shareholders must be residents and there cannot be more than 100 shareholders for the company as well as only enabling one class of common to be issued. The state regulations also specify that the portion of revenue that must be derived from business activity, not from passive investments (Hatten, 2009). An S corporation has strict rules and regulations in order to meet up to all of their standards as well as maintain being an S corporation.
5. Limited Liability Company (LLC): A LLC is a corporation that taxes the owners as partners, but it provides a more flexible structure than an S corporation (Hatten, 2009).
Advantages:
In a Limited Liability Corporation there are limited liability protections installed in a normal corporation as well as tax advantages of a partnership (Hatten, 2009). Being an LLC there are less restrictions than in a corporation which makes them different than an S Corporation. In an LLC shareholders are not owners and they do not represent ownership of the company, rights and responsibilities of members are specified in the operating agreement put out by the LLC when the company is first formed (Hatten, 2009). LLC’s are not held back by the restraining rules and regulations that are put on other corporations. LLC’s allow for flexibility in the internal and external structure of a business.
