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My undergraduate degree was in interior design, which I truly loved, so I did that for a few years
before finding my way to my current company. I started as a 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. z Sole proprietorships are easy and inexpensive to form but
the owner is fully and personally liable for any business debts (Lip, 2022). They can 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 like sole proprietorships in that the income
from the business is split and taxed on the individual partners 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). z 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. z 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. 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. z
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. z 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. z 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. 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. z z 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. If the 2553 was filed, they would complete an 1120-S tax return. Income
and expenses would pass through to the personal tax return via a K-1.
Again, there are several types of corporations. z A corporation is usually harder to set up. z They can be
subject to double taxation. “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. z No income and expenses are passed through to the owner. z z
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. z An S-Corporation is required to have fewer than 100 shareholders. z Distributions
are also sometimes given if warranted. z
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. z 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). z 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.
Sole proprietorships are businesses run by one person. A few advantages of a sole proprietorship are
that they are easy to start and does not require the business to be registered with the Secretary of State.
Also, there are fewer regulation on sole proprietorships, along with having the freedom to take all
profits and not having to answer to anyone else. The disadvantages to sole proprietorships are that all
liability is taken on by the sole proprietor and that all business profits are subject to both income and
self-employment taxes.
Partnerships are a business entity formed by two or more individuals and are separately co-invested in
the business. A few advantages of partnerships are that it is a pass-through entity, meaning that the
partnership does not pay income tax, but the individual partners are responsible for including profits
and losses on their tax returns. Also, partners are liable for each partners’ mistakes, unless the
partnership is a limited liability partnership.
Corporations are business entities that are separate and distinct from their owners. They have the same
rights and responsibilities as individuals. A few advantages of corporations are that there is limited
liability between owners. Shareholders are only liable for their investment and the corporation shields
them from any further liability. Also, corporations are pass through entities, meaning that the
corporations do not pay income tax, and profits and losses are passed through to their shareholders.
Disadvantages of corporations are that there are many types of income and other taxes to be paid,
depending on the type of corporation, and there is double taxation.
In the future, I plan on having my own CPA firm. If I were to choose a business structure, starting out
I would most likely start as a sole proprietor, as I will be starting the business on my own and will keep
the business small. As I grow my business, my business structure will change. If I choose to bring on
a partner or more, I will change my business structure to a partnership.
References
Bragg, S. (2022, November 20). Corporation advantages and disadvantages. Accounting Tools.
Retrieved February 2, 2023, from https://www.accountingtools.com/articles/corporation-advantages-
and-disadvantages.html
Dtallent, B. (2022, December 20). Sole proprietorship vs. partnership: Differences between these
types of businesses. Camino Financial. Retrieved February 2, 2023, from
https://www.caminofinancial.com/sole-proprietorship-
partnership/#:~:text=While%20partnerships%20have%20to%20pay,sole%20proprietorships%2C%20
partnerships%20are%20easy.
Ancheta, A. (2023, January 23). What is a C crop? 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). Accounting Tools. 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
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