Question

Describe what tax and other considerations might cause you to set up a corporation rather than a proprietorship or partnership when you start a business. Use a real business to explain your decision, and offer an argument as to the advantages and disadvantages of the options.

Answer 1

In case of sole proprietorship, a business is owned by individuals. Thus, the owner reaps all the profits and has unlimited liablitiy for all losses. If things go poorly, the owner's personal assets are in a risk to be seized. Earnings are added to the income, and hence, the taxes are paid on the total income. Because it is not a separate a separate legal entity that can be divided and sold in pieces, it is more difficult to raise money in financial markets.

In case of partnerships, several individuals form a business and enter into a partnership. As in a proprietorship, each owner's shsre of the earnings is included on his or her personal tax returns. Hence, the bracket for tax benefit is always less.

Coming to the business structure of corporation, they are legal entities registered within a state and are separate from the individuals who own them. In the eyes of the law, a corporate is treated as an individual who conducts his or her laws independently. The assets and liabilities are owned by the corporation, not the owners of the corporation.THis is a major advantage for taxation on corporation compared to proprietorship or partnership. As with limited partnerships, owners of corporation have limited liability for the oligations of the business. Corporates dividends are taxable. Though the corporation includes double taxation, it does not fall on the owners, thereby maintaining the corporate's limited liability advantage.