Sales assistant and quickly worked my way up in the company - anytime I had an opportunity to
learn another area of the company, I took it. That led me to get into the accounting department,
which is where I really excelled. I found my passion in that area and continued to work my way
up until I became the head of our accounting department. While I do love my company, I am
beginning to feel that I am meant for bigger and better things, which is why I came back to
school. I cannot wait to continue my education and gain more knowledge in a field that I am
passionate about, I feel this will open doors for me to grow further in my career.
When starting a business, choosing the right entity for your business is very important. Of the
three entities, a sole proprietorship is the easiest, as it consists of one sole owner who has
complete control over the business. When looking to start with a partnership, there are two or
more owners that will be involved. Each of these types of entities do have similarities when it
comes to their tax advantages and disadvantages. For instance, with each of these entities, the
business’s income and expenses are taxed on the owner(s) individual tax returns. However, these
do come with some disadvantages. With each of these entities, the owner(s) do not have any
personal liability protection. The owner(s) are also not able to deduct their salary. Additionally,
the owner(s) would be subject to self-employment taxes on the business’s income.
A corporation is quite different from a sole proprietorship or a partnership, it is a legally separate
entity “owned by one or more shareholders who might be individuals or entities” (Chron, 2021).
A corporation does offer its shareholders limited liability protection from any of the business’s
debts or actions. However, it does require a lot of money to start a corporation, they must pay
things like startup taxes and operation costs. Corporations are also highly regulated by state,
federal, and local agencies, which does require more paperwork.
If I were opening a chain of gas stations with three other investors, then a sole proprietorship can
be automatically ruled out since I would not be the only owner. In this situation, I feel that a
corporation would be the best choice for our business. This will allow us to have personal liability
protection as shareholders and is the easiest when it comes to tax reporting. It will also allow us
to take reasonable salaries and pass-through net profits.
There are numerous advantages and disadvantages to be mindful of when choosing which tax
reporting entity to use for a new business. Sole proprietorships are easy and inexpensive to form
but the owner is fully and personally liable for any business debts (Lip, 2022). They are able to
contribute money and take profits out of the business without incurring any tax consequences, but
they are also unable to deduct any compensation they receive for themselves. As a sole
proprietorship, all money belongs to the owner and the owner will file taxes as an individual at
their own marginal tax rate. Partnerships are also easy and inexpensive to form and are similar to
sole proprietorships in that the income from the business is split and taxed on the individual
partner’s tax return. A disadvantage to a partnership is partners may also assume responsibility
for any losses or debts from the other partners. (Kopp, 2021).
Corporations are the most complicated tax entity to form and can be subject to double taxation,
but all owners have limited liability as they are only liable up to the amount of their investments
(Bragg, 2018). Depending on which type of corporation is formed, there can be an easy way to
generate large amounts of capital for the company in the form of bonds. Owners take their share
of profits or losses and report them on their own tax returns in the form of salaries and dividends.
Sole proprietorship as the best business entity for a small, local plant nursery. It is easy and
inexpensive to form and the taxation method is uncomplicated. The owner will report all profits
and losses on their personal tax returns and can easily contribute or take profits out of the
business without tax consequences.
There are multiple advantages and disadvantages to choosing a Sole Proprietorship, Partnership or
Corporation. Sole Proprietorships are a legal extension of the owner, with income and expenses
reported on Schedule C of Form 1040. The individual tax rate may be lower than a corporation.
An owner of a Sole Proprietorship can contribute or withdraw money without tax consequences,
and the money belongs to the owner personally. Disadvantages include income being subject to
Self-Employment taxes at a rate of 15.3%. The fiscal year of the Sole Proprietorship must be the
same as the owner/individual, which means income cannot be deferred. Salaries paid to the
owner are not deductible.
Partnerships are an unincorporated business with two or more owners. Income and expenses are
reported on Form 1065, but the entity does not pay taxes. Income and all tax related items flow to
the partners on Form K-1, which must be included with their individual tax return. The
Partnership can be either General or Limited. d General Partnerships liability is unlimited for each
partner and can be greater than their investment. Limited Liability partners are only liable to the
extent of their investment. Profits are taxed at the partner level, regardless of if there are
distributions or not during the year. Self-Employment tax of 15.3% is the be paid on income.
Corporations can be formed as either an S Corporation or C Corporation. Both have limited
liability. C Corporations report income and expenses on Form 1120. Shareholders of the C Corp
are taxed on dividends reported on Form K-1. The individual tax rate may be higher than the tax
rate of a C Corp. Shareholders are entitled to fringe benefits, half of Social Security and
Medicare withholding are paid by the Corporation and salaries can be deducted. A disadvantage
of C Corporations is double taxation. Profits are taxed at a corporate level, and distributions are
taxed at the shareholder level. S Corporations have limits to the number of shareholders but are
not subject to double taxation. All earnings flow to the shareholders on form K-1 based on their
ownership percentages and are reported on their individual tax return.
Charlene decides to help a few friends by doing their bookkeeping on a quarterly basis. She does
not plan on this becoming a large business and does not have many expenses. She would benefit
from running this business as a Sole Proprietorship, as it will not be her sole source of income,
and she does not expect a large revenue stream. This can easily be recorded on Form Schedule C
to keep things simple.
Regardless of the entity structure, there are advantages and disadvantages to selecting a sole
proprietorship, a partnership, or a corporation for a new business. Several considerations (including
tax reporting) must be considered. A sole proprietorship is the easiest and most cost-effective to set
up (Ancheta, 2023). This type of entity accounts for payments to owners who work at the business
by taking draws or drawing money out of the company. Income and expenses are reported on the
personal tax return via a schedule C.
There are several different types of partnerships, but speaking in general terms a partnership is easy
to set up and is usually inexpensive to get started. A partnership has an operating agreement between
the partners. It can elect to be taxed as a partnership or as a corporation. A lot of the partnerships
that I work with have submitted the IRS form 2553 to elect to be taxed as an s-corporation. d d Partners
in a regular partnership typically receive guaranteed payments for services or use of capital.
However, if they have done the s-election they get paid payroll if they are working for the business. d
A partnership would file a 1065 tax return and income and expenses would pass through to the
partners on their personal return via a K-1. d If the 2553 was filed, they would complete an 1120-S tax
return. d Income and expenses would pass through to the personal tax return via a K-1.
Again, there are several types of corporations. A corporation is usually harder to set up. d They can be
subject to double taxation. d “C Corporations pay corporate taxes on earnings before distributing their
profits to the shareholders in the form of dividends. Individual shareholders are then subject to
personal income taxes on the dividends they receive” (Ancheta, 2023). The income tax would be
calculated and due on the 1120 tax return. d No income and expenses are passed through to the owner.
d If an s-corporation was set up by filing the IRS form 2553, owners working at the business would be
paid payroll. Income and expenses are passed through to the owners via a K-1 and allocated by
ownership interests. An S-Corporation is required to have fewer than 100 shareholders.
Distributions are also sometimes given if warranted. d
When working in the accounting field, it is sometimes necessary to assist a new business owner with
identifying the most appropriate entity structure for tax purposes. “A sole proprietorship is an
unincorporated business with one owner” (Rittenberg, 2023). An example of a good fit for a sole
proprietorship would be a single owner starting out a very small photography business in their spare
time. d Income and expenses for the business would be reported on a Schedule C with the personal tax
return. “As a sole proprietor, you are personally responsible for all your business debts and
obligations, including loans, leases, credit accounts and lawsuits.” (Rittenberg, 2023). The nice thing
about a sole proprietorship is that it can always be converted to another type of entity in the future
should liability protection, for example, be a concern.
References:
Ancheta, A. (2023, January 23). What is a C corp? Investopedia. Retrieved February 2, 2023, from
https://www.investopedia.com/terms/c/c-corporation.asp
Rittenberg, J. (2023, January 24). What is a sole proprietorship? Forbes. Retrieved February 2, 2023,
from https://www.forbes.com/advisor/business/what-is-a-sole-
proprietorship/#:~:text=A%20sole%20proprietorship%20is%20an%20unincorporated%20business%2
0with,sole%20proprietorship%E2%80%93you%E2%80%99ll%20automatically%20be%20a%20gene
ral%20partnership%20instead.
Bragg, S. (2018, December 29). AccountingTools. AccountingTools.
https://www.accountingtools.com/articles/corporation-advantages-and-disadvantages.html
Kopp, C. M. (2021, September 7). Partnerships: What You Should Know. Investopedia.
https://www.investopedia.com/terms/p/partnership.asp
Lip, G. (2022, October 27). Sole Proprietorship. Corporate Finance Institute.
https://corporatefinanceinstitute.com/resources/management/sole-proprietorship/
Chron.com. (2021, October 18). The pros & cons of a sole proprietorship &
corporation. Chron.com. Retrieved February 2, 2023, from https://smallbusiness.chron.com/pros-
cons-sole-proprietorship-corporation-55884.html
