There are numerous advantages and disadvantages to be mindful of when
choosing which tax reporting entity to use for a new business. b 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). b 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. b 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. b
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.
References
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/
