Question

In: Accounting

Explain in detail with an example Forms of Business Organizations a) A sole proprietorship b) A...

Explain in detail with an example Forms of Business Organizations

a) A sole proprietorship

b) A partnership

c) A corporation

Solutions

Expert Solution

Answer:

Forms of Business Organization

These are the basic forms of business ownership:

a. Sole Proprietorship

A sole proprietorship is a business owned by only one person. It is easy to set-up and is the least costly among all forms of ownership.The owner faces unlimited liability; meaning, the creditors of the business may go after the personal assets of the owner if the business cannot pay them.The sole proprietorship form is usually adopted by small business entities.

Advantages :

  • Simplicity in retirement plans
  • Easiest form of business to set up and dissolve
  • Avoids the expense of forming a partnership or corporation

Disadvantages:

  • You are on your own.
  • Unlimited personal liability for all debts of the business.
  • self employment taxes of 15.3% on the first $106,800 of earnings.

b. Partnership

A partnership is a business owned by two or more persons who contribute resources into the entity. The partners divide the profits of the business among themselves.
In general partnerships, all partners have unlimited liability. In limited partnerships, creditors cannot go after the personal assets of the limited partners.

Advantages:

  • Partnerships are relatively easy to establish; however time should be invested in developing the partnership agreement.
  • Prospective employees may be attracted to the business if given the incentive to become a partner.
  • The profits from the business flow directly through to the partners’ personal tax return.

Disadvantages:

  • Profits must be shared with others.
  • Some employee benefits are not deductible from business income on tax returns.
  • The partnership may have a limited life; it may end upon the withdrawal or death of a partner.

c. Corporation

A corporation is a business organization that has a separate legal personality from its owners. Ownership in a stock corporation is represented by shares of stock.
The owners (stockholders) enjoy limited liability but have limited involvement in the company's operations. The board of directors, an elected group from the stockholders, controls the activities of the corporation.

Advantages:

  • Shareholders have limited liability for the corporation’s debts or judgments against the corporation.
  • Corporations can raise additional funds through the sale of stock.
  • A Corporation may deduct the cost of benefits it provides to officers and employees.

Disadvantages:

  • The process of incorporation requires more time and money than other forms of organization.
  • Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations.
  • Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible from business income; thus this income can be taxed twice.

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