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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
Hard to set up
External
financial
reporting
required
Board of
directors
required
State and
federal
documentation
to establish
funding and
loans.
Debt stays
with the
entity, not
the owners
or
shareholders
Taxes are
paid by the
entity
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).
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,establi
shing%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
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