Question

The questions below are about three types of business entities: 1) sole proprietorships; 2) partnerships; and 3) corporations (for federal tax purposes, corporations are referred to as C corporations or as regular corporations).

1) Define each entity.

2) For federal tax purposes, how is each entity and their owners taxed?

3) What are some of the advantages and disadvantages of each entity?

Answer 1

1) Define each entity.

Sole prop.: It is an entity run by single person only. All the assets, liabilities, profits and losses are to be borne by single person. This form of entity is suited when the busienss is small and can be managed by one person like a grocery shop

Partnership: It is an entiry when two or more persons come into agreement to run a business. Here some partners shall be in full time working and some shall just be the capital investor looking at the business acctiviities passively.

Corporations: It is an business entity consisting of shareholders havign distince entity from who is running it. It is runned based upon the acts governing it like Corporation Act

2) For federal tax purposes, how is each entity and their owners taxed?

• under a partnership structure, the profits a business earns flow directly to the personal income tax returns of the owners. For example, if a partnership with two owners makes $500,000 in profit and the owners split profits equally, each would have to report $250,000 in income on their personal tax returns. Partners are responsible for paying self-employment taxes on business income.
• According to the IRS, the corporations pay income taxes on profits when they are earned. Unlike the owners of partnerships, shareholders are not responsible for paying taxes on the profits a corporation earns. Shareholders of corporations are not subject to self-employment taxes.
• As a sole proprietor must report all business income or losses on personal income tax return; the business itself is not taxed separately. (The IRS calls this “pass-through” taxation, because business profits pass through the business to be taxed on your personal tax return

3) What are some of the advantages and disadvantages of each entity?

• Sole proprietorships and partnerships cost less to establish
• Sole proprietorships and partnerships have minimal formalities
• Sole proprietors and partners are not liable for unemployment insurance
• Shareholders in a corporation are not liable for corporate debts
• Corporations offer self-employment tax savings
• Corporations have continuous life
• Corporations make raising money easier
• Transferring the ownership interests of a corporation is easier

(you can adjust language if you require seprate adv and disadv., I have put all in once with comparison )