Sole Proprietorship
A pass-through
business with one
owner who pays
personal income
from business profits
(Twin, 2022).
Easy to establish and
close the business.
Easy to file taxes
(included on 1040)
Limited government
regulatory burdens
No protection; owner
not exempt from
liabilities incurred by
the entity
Partnership
A pass-through entity
business with 2 or
more owners who
agree to share profits,
losses, financial and
legal liabilities of an
entity, and business
responsibilities
(Bloomenthal, 2022).
Revenues and
expenses are passed
directly to the partner
and are included in
individual tax returns
• Easy to
establish and
dissolve
• Taxes are
paid by
partners, not
the entity
• No external
financial
reporting is
required
• Unlimited
liability
incurred by the
entity, even if
one owner is
liable for
something and
the other has
little to no
involvement
(Bloomenthal,
2022).
• Personal assets
can be used in
litigation
against the
entity
• Disputes can
be difficult to
resolve unless
the business is
well planned
and the terms
of the business
are well
documented
Corporation
A legal entity that is
separate from owners
that is created with a
common goal.
Revenues are paid to
workers and owners
of the company, who
then pay income tax.
The entity also pays
taxes
• Very well
protected
from
liability; the
entity is
liable, not
owners or
shareholders
• Assets can be
used to
secure
funding and
loans.
• Debt stays
with the
entity, not the
owners or
shareholders
• Taxes are
paid by the
entity
• Hard to set up
• External
financial
reporting
required
• Board of
directors
required
• State and
federal
documentation
to establish the
entity is
required
• Double taxation
When trying to determine which entity to use, the future or vision of the business needs to be
considered. If someone is working by themselves and has a small outfit or structure, a LLC or
sole proprietorship is likely sufficient for their needs. It would be easy to set up and dissolve, and
the individual could get started without the burden of external financial reporting, setting up a
board of directors, to having to file complicated tax forms. However, they would be limited in
funding prospects (investing and loans) because they would need to have enough collateral; they
would be fully liable and investors or loan outfits may be less willing to invest in them.
As another example, if physicians would like to operate a medical facility, they may want to
consider the use of an LLC partnership. Profits and responsibility of the business would be
divided equally between the partners, while also having some protection as an entity that is also
an LLC. With an LLC partnership, the liability is limited to the amount put into the business
(Beattie, 2022).
In a sole proprietorship one person gets to control the decision making and reap the profits.
Unfortunately, a sole proprietor is individually liable for debts and damages incurred by the
business. A partnership allows for additional individuals to contribute capital and management
duties. Partners share in responsibility for debts and damages of the business and may risk
personal assets. Furthermore, every time a partner wants to leave or join, the partnership must be
reformed. Members of both types of organizations will be taxed at their personal tax rates for
their share of profits or losses.
Corporations protect investors from personal liability beyond their investment in the business. d An
S-corporation will act as a flowthrough entity and investors will be taxed at their personal tax
rates for their share of income/losses; C-corporations will be taxed at corporate rates (and
investors will be taxed at personal rates for dividends received). Corporations allow investors to
come and go as they can buy and sell shares of stock while the entity remains intact.
In setting up a tutoring business, I would choose to utilize the advantages of an S-corporation. It
would allow additional investment from others while avoiding the potential for double taxation.
Beattie, A. (2022, November 10). What is a limited liability partnership? Investopedia. Retrieved
February 2, 2023, from https://www.investopedia.com/articles/investing/090214/limited-liability-
partnership-llp-
basics.asp#:~:text=Limited%20liability%20partnerships%20(LLPs)%20allow,establishing%20a%
20division%20of%20labor.
Team, T. I. (2023, January 13). Corporation: What it is and how to form one. Investopedia.
Retrieved February 2, 2023, from https://www.investopedia.com/terms/c/corporation.asp
Twin, A. (2023, January 17). Sole proprietorship: What it is, Pros & Cons, examples, differences
from an LLC. Investopedia. Retrieved February 2, 2023, from
https://www.investopedia.com/terms/s/soleproprietorship.asp
