Forms Of Business Ownership

Sole Proprietorship The sole proprietorship form usually is advantageous to a new business because of its ease of organization. The business owner is responsible for all financing, management decisions, and liabilities of the business. Advantages * The owner is in direct control (you are the boss). * There are low start-up (organizational) costs. * It's the form with the least government regulation. * This form offers ease of formation and a simple structure. * There is no double taxation. * Business losses can offset personal income (for tax purposes). * The owner receives all profits. Disadvantages * The owner has total (unlimited) personal liability. * The business has limited financial resources (capital). * There is a lack of continuity if the owner is disabled or dies. * The owner may have limited managerial expertise. * All profit is taxed as personal income. * The business can expand only with after-tax dollars. Most home-based businesses use the sole proprietorship form. It is simple, inexpensive, and requires less complex record keeping methods than the other forms of ownership. Partnership A partnership provides the opportunity to pool the capital and management resources of two or more individuals to conduct business. Two types of partnerships are the general and the limited. A general partnership is fairly easy to establish. A written partnership agreement drawn up by an attorney should be used to clarify business arrangements and to avoid misunderstandings. The general partnership agreement should include the following: a list of the rights and responsibilities of each partner and their heirs; the management and continuity arrangements for the business in the event of the death or disability of one of the partners; the profit and loss distribution plan; and any special conditions or arrangements that may affect any of the partners through operation of the business. When signed by all partners, the agreement is an enforceable contract. Advantages * Simple organization * Additional personal resources (financial and managerial) * The right to select partners * Low start-up (organizational) costs * Limited outside regulation * No double taxation Disadvantages * Unlimited liability for partnership obligations * Lack of continuity when one partner dies or is disabled * Sharing of profits * All profits taxed as personal income * Difficult to raise additional capital * Hard to find suitable partners * Divided authority (limited decision making) A limited partnership permits investor involvement with liability limited to the amount of the investment or the amount agreed to in the limited partnership agreement. The limited partnership must include at least one general partner who has general liability for the debts of the limited partnership. The general partner usually manages the business. The limited partner usually exercises no control over the business of the partnership but is merely an investor. Advantages * The general partner maintains control of the business. * The limited partner can invest with a limit on personal liability. * It is an easy way to secure capital. * The business is not taxed directly. Disadvantages * This structure is complex to organize. * The limited partner has no control over the business. * The general partner has unlimited personal liability for the obligations of the business. * There is a lack of continuity in the event of the death or disability of the general partner. Corporation A "C" corporation is a separate legal entity from its owners, the shareholders. It can enter into contracts, can be liable for any obligations, and must pay taxes on income as well as dividends distributed to shareholders. A corporation attracts capital investment funds by selling shares of stock in the company to investors or by trading stocks for assets. Generally, stockholders are not liable for claims in excess of the current value of their shares. Corporate officers may be required personally to guarantee bank notes or loans; they are then personally liable for the obligation. Other creditors generally can lay claim only to the assets of the corporation. Advantages * Limited personal liability * Separate legal entity * Specialized management * Transferable ownership * Perpetual life * Easier to raise capital Disadvantages * Closely regulated * Most expensive to organize * Complex organization and management * Extensive record keeping necessary * Double taxation One corporate form that home-basers may consider is the "S" corporation (Subchapter S Corporation). The "S" corporate structure should be considered for the following situations: * The owners expect operating losses. * Large dividends are anticipated. * The owner's individual tax rates are lower than the corporate tax rates. * There are 75 or fewer stockholders. * The corporation has only one class of stocks. The "S" corporate structure allows a tax burden shift to shareholders. The election is made formally on Form 2553 filed with the Internal Revenue Service. The election can be made at any time during the previous year or up to March 15 of the year of election. By April 15, the "S" corporation also must file an informational return allocating profits or losses to shareholders. Before deciding on a form of business ownership, consult an attorney and a certified public accountant (CPA). Their expertise can help you avoid making costly mistakes. The final decision should be based on what is best for your individual situation and business needs. Limited Liability Company (LLC) A limited liability company (LLC) is a business entity created by statute. It has some characteristics of a partnership and some characteristics of a corporation. A LLC has the tax advantages of a partnership and the limited liability advantages of a corporation. Properly structured, it is taxed as a partnership or an "S" corporation. If the LLC is not properly structured, it is taxed as a "C" corporation. Forming a LLC is more complex than forming a partnership, but it is less complex than forming and operating a corporation. Forming a LLC is a formal process, contact the Mississippi Secretary of State at 601/359-1633. LLC's are a relatively new form of business in Mississippi. Legislation creating this form of business was passed in 1994. It should be noted that the lack of precedent adds some uncertainty to adopting this form of business. Experts predict however, that the LLC will quickly become the form of choice for many small businesses.