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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. z
A partnership allows for additional individuals to contribute capital and management duties. z 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. z 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. 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.
After graduation, I started to pursue my dream but it did not come easily. I attempted to get my degree
several times but life seemed to get in the way. Finally, when my children were in elementary school I
succeeded. They are now grown and out of the house so I have decided that now is the time for me to
get the masters degree that I have talked about for so many years.
I am currently working for a boutique public accounting firm in Florida and have been with them for
the last 2.5 years. I work on the accounting services side, not the tax side. Most of my clients are non-
profit corporations but I do have a variety of companies that are for profit. Prior to my public
accounting days, I worked for private companies in various industries.
When deciding how to structure a new business venture, several aspects must be considered. These
include the ease and cost associated with the formation, the amount of liability one is will to assume,
tax implications and the complexity of regulations and accounting.
Sole proprietorships and general partnerships are very similar to each other. They are easy and
inexpensive to set up. For partnerships, a written agreement is preferred but it is not required. The
income or loss from the business is passed along to the owner(s) personal tax return whether a
disbursement has been taken. The owner(s) are also personally liable for company debts. Sole
proprietorships and partnerships can be a good choice for low-risk businesses and owners who want to
test their business idea before forming a more formal business (SBA, 2019).
Choosing to be a corporation offers some protection from the personal liability associated with sole
proprietorships and partnerships but it is more complex and costly to establish. Corporations fall into
two categories: C corporations and S corporations. Shareholders who employed by C corporation are
employees and benefit from non-taxable fringe benefits and are only responsible for half of the
employment taxes as the corporation is responsible for the other half. If an S corporation has been
elected, the employed shareholders are still only responsible for half of the employment taxes but do
not benefit from non-taxable fringe benefits. A C corporation is subject to double taxation. Its
earnings are taxed first at the corporate level when earned, then again at the shareholder level when
distributed as dividends. An S corporation, by contrast, is subject to single-level taxation, much like a
partnership (Anderson, et al., 2023). Corporations can be a good choice for medium- or higher-risk
businesses, those that need to raise money, and businesses that plan to "go public" or eventually be
sold (SBA, 2019).
When starting a business, one of the first things that people need to worry about is the formation.
Anderson et al. (2023) explains the differences between the most popular ways to form a business. A
sole proprietorship is essentially the easiest business to start because it only involves one owner and it
has simple rules. This business entity is not subject to double taxation, and the owner will pay their
marginal rate on income after potentially qualifying for a 20% business deduction. On top of these
advantages, it is easy to contribute and withdraw cash and property. On the flip side, the full tax
amount must be paid on earnings whether they come out of the business or not. On top of that, owner-
employees are unable to deduct compensation and there are limitations on social security tax cuts and
using the fiscal calendar. Moving on, partnerships have a similar tax treatment as sole proprietorships,
there can just be multiple owners. Double taxation is avoided, and partners simply pay taxes on their
shares of earnings based on their individual rate, less a potential 20% business income deduction. The
disadvantages also closely mirror the last option, and partners are not considered employees of the
business, so there isn’t a lot of preferentially tax treatment for work done within the business by
owners. Finally, corporations offer a quite different approach because they are an entity separate from
their owners. The big difference is that in this case, there are more deductions available and owner-
employees can be considered separate employees. That results in preferential tax treatment and
benefits. On the negative end, double taxation typically results in a higher tax bill. Furthermore,
money withdrawn or deposited has to be recognized and many losses can’t be transferred to owners
until they are realized.
Many times, the simpler solution is often the easiest. As an example, imagine four investors that want
to open a gas station together. If I was guiding their decision, I would advise them to set the business
up as a partnership formation within an llc. According to the IRS (2022), an LLC set up as a
partnership can avoid a lot of the upfront paperwork that you would get when forming a corporation.
Despite this, it offers limited liability and avoids double taxation. There is also a ton of freedom when
it comes to depositing and withdrawing within the business, and should things not work out, it can
easily be dissolved. Unfortunately, there could be some hang ups if the investors want to spend a
significant amount of time working in the business as employees. If that is the case, a corporation may
be favourable due to the separation.
Anderson, K., Hulse, D., and Rupert, T., Prentice Hall’s Federal Taxation 2023 Corporations,
Partnerships, Estates & Trusts. 2023.
IRS. (2022). Publication 541 (02/2022), Partnerships. Retrieved from
https://www.irs.gov/publications/p541#en_US_201312_publink1000104201
Anderson, Kenneth, et al., editors. Pearson’s Federal Taxation 2023 Corporations, Partnerships,
Estates & Trusts. Pearson Education, Inc, 2023.
U.S. Small Business Administration. “Choose a Business Structure”. November 19, 2019,
https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
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