Question

For each of the following entities, briefly describe the advantages and disadvantages:

1) Sole Proprietorship

2) Partnership (General partnership - ignore limited partnerships)

3) Classic "C" Corporation

4) "S" Corporation

5) LLC/LLP

Answer 1

Solution

Sole Proprietorship

Advantages

1) The proprietor would have full control over the business.

2) Decisions can be made quickly as he need not wait for suggestions and approval.

3) The process of formation and dissolution of sole proprietorship is comparatively easier.

Disadvantages

1) When the business incurs a loss, the sole proprietor has to bear all the losses

2) The liability would be unlimited.

3) Decisions made by the proprietor all by himself may not be appropriate and may have a negative impact over the business.

Partnership

Advantages

1) It would be possible to raise more capital by admitting new partners.

2) The skill and expertise of all the partners contributes to the business growth.

3) There would be an overall close supervision over the entire business.

Disadvantages

1) The liability would be unlimited

2) The partners would have to entail significant amount of risk as all the partners and the firm would be bound by any fraudulent or inappropriate act of any of the partners.

3) The investment in a partnership business is considered to lack liquidity as it wouldn't be possible for a partner to transfer his interest to a third party unless it is agreed unanimously by all the other partners.

Classic C Corporation

Advantages

1) The shareholders would have limited liability

2) The C Corporation has its own legal identity and continues its business unless it is liquidated and wound up.

3) The shareholders can easily sell their shares.

Disadvantages

1) The revenue is taxed twice ( in the hands of company as well as the shareholders)

2) C Corporation is subject to more rules and regulations

3) Corporate losses cannot be deducted by the shareholders while filing their individual returns.

S Corporation

Advantages

1) There would be no double taxation as it is a pass through entity.

2) Owner's personal assets are protected from claims arising from the creditors.

3) The shareholders can avail tax benefits by opting to receive both salary and dividends.

Disadvantages

1) Incorporation expense would be high.

2) It would be subject to strict scrutiny by IRS

3) Allocation of income and losses would be difficult as S Corporation will have only one class of stock.

LLC/ LLP

1) Enjoys the benefit of pass through taxation. Revenue is taxed at only one level.

2) There would be limited liability

3) An LLC can have any number of members.

Disadvantages

1) Finding a source for capital is comparatively difficult as LLC is subject to high levels of legal requirements.

2) The entity would have to incur comparatively higher fee for legal and statutory requirements.