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I first became interested in accounting after I spent a day job shadowing my uncle. He was
a payroll accountant at a municipality. Honestly, I did not really understand the day-to-day of what
he did, but I could clearly see he enjoyed doing it. He didn’t hate it, while every other adult in my
life hated their jobs. He was happy, joking with co-workers, and getting tons of overtime. This
stuck with me. Years later, on the eve of my 30th birthday, I needed to make a career change. I had
been working in the hospitality industry for years and had lost all interest in cooking
professionally. I have now been an accountant longer than I was a cook and like my uncle before
me I love being an accountant.
By earning my master’s degree, I hope to develop the skills needed to move up into a
management position with my current employer. I work at the largest affordable housing
organization in Southern Maine. The finance team supports the other departments that build and
manage safe, clean, affordable housing for the unhoused, low-income, new-Mainers and seniors.
When I am not at work, my wife and I spend time with our cats often watching horror movies.
When deciding what form your new business should take, you must consider the advantages and
disadvantages of each form. A sole proprietorship is an unincorporated business owned by one
person (Anderson, et al., 2023). A sole proprietorship is not a separate entity from the owner.
Income and expenses are presented on the owner's individual tax return. There are no tax
consequences for contributing cash to or withdrawing profits from the business. Sole
proprietorships are responsible for the full Social Security taxes, unlike corporate employees
(Anderson, et al., 2023).
A partnership is an unincorporated business run by two or more entities for profit
(Anderson, et al., 2023). The partnership does not pay taxes, the income passes to the returns of
the partners. Partnership income is not double taxed. With few exceptions income contributes to
the partnership or profits withdrawn are generally not taxed (Anderson, et al., 2023). The partners
must pay taxes on profits even if there are no distributions. Partners must pay the full self-
employment taxes (Fleischman & Bryant, 2000).
A C-Corporation is a separate and distinct entity from its owners (Anderson, et al., 2023).
C corps are taxed at the corporate level and when earnings are distributed to shareholders
(Fleischman & Bryant, 2000). Shareholder employees only contribute half of the Social Security
taxes. A C-Corp can also use a fiscal year-end instead of a calendar year-end (Fleischman &
Bryant, 2000). Unfortunately, net operating losses convene no tax benefit to the shareholders in
the year of the loss. The same is true for capital losses (Anderson, et al., 2023). An S-corporation
is a passthrough entity with characteristics of both a partnership and the protections of a
corporation.
Sole proprietorship example: Betsy Cashew had recently been let go from a large tech
firm due to a contraction in that industry. Within days of this news, Betsy received a gift from a
relative that had passed, $30,000. With these funds Ms. Cashew decides to purchase a used van, a
shop vac, a bundle of microfiber clothes and a king’s ransom in cleaning against and polishes;
Betsy was opening her own mobile car detailing service. She never wanted to have a boss that
could fire her again, she wanted control. Betsy is the sole owner and employee. There is no plan to
expand the business or hire additional help. Betsy Cashew has decided to establish her business in
the form of a sole proprietorship.
A sole proprietorship has a single owner (SBA, n.d.). It does not have shareholders and all
liabilities of the business are in the hands of the owner. The companies assets and liabilities aren
not separate from the owners assets and liabilities. The advantages and disadvantages can alternate
for a sole proprietorship depending on the circumstances. A sole proprietorship is easy to create
and give the owner complete control over the business. Be personally liable for the debts and
obligations can be a disadvantage of this type of business. Being labeled as a sole proprietorship is
good for low-risk companies.
A partnership has two or more owners and the liabilities are split amongst them (SBA, n.d.). There
are limited liability partnerships and limited liability partnerships. With a limited partnership, one
partner has unlimited liability while the other partners have limited liability. Profits are split
among the parters and pass through the personal tax returns. The general partner must also pay
self-employment taxes. Limited liability partnerships give limited liability to each partner. The
advantage of this type of partnership is it protects partners from debts associated with other
partners.
A corporation is typically owned by multiple stakeholders and is a separate entity from the owners
(SBA, n.d.). An advantage of a corporation is it provides the most protection for owners regarding
liabilities. However, a disadvantage is it requires more extensive record keeping and operations.
Corporations are taxed when they make a profit and then when they pay dividends. Corporations
also have the advantage of being able to sell stock to help raise funds. A corporation is good for
high-risk companies.
My dad started his own electrical company about four years ago. He started off a sole
proprietorship as it was just him running the business with known employees. Recently his
company has expanded and he now has three employees. Therefore, he made the switch to an
LLC. He gained more assets during his expansion and becoming an LLC helps him protect those
and protect him from personal liability (SBA, n.d.). His business is taxed as a c corp, which means
he pays taxes on gross income and then the earning are distributed to him (Truic, 2023). Then he
must also pay income tax on dividends. Being an LLC is good for his company because it is a
small business with a medium to high risk.
A sole proprietorship has a major advantage due to the simplicity of setting up this type of entity
compared to all others. A person simply becomes a sole proprietor by running a business. Another
advantage would be that the owner will have 100% ownership of the business and control as well.
A sole proprietor can only have one owner and the owner is entitled to all profits as well as full
control of the business. However, a disadvantage would be the liability of the business. The owner
of a sole proprietor is held responsible for all liabilities related to the debt and obligations of the
business. This means that the owner could have to pay out on his personal accounts, assets, or
property to cover all debts. A partnership has the advantage of obtaining capital easily. Due to the
cost of starting a business from the ground up, this will allow many more opportunities for the
business to obtain capital from various resources. A partnership allows an individual to not carry
all of the burdens when providing capital due to the capital is dispersed between all members of
the partnership. This will allow for an increase in overall financial security and cash flow for the
business. Another advantage would be taxation on a partnership. You will only pay taxes on your
share of the business and everyone involved would pay their share of the taxes. Therefore, you will
file and pay taxes on your share of the business which will reduce the overall burden of having to
pay all taxes for the company. A disadvantage of a partnership would be the decision-making of
the company. Everyone will need to come to an agreement otherwise nothing will happen. This is
considered a disadvantage due to people involved can have different ethics and can cause clashes
over matters.
Lastly, we have corporations that are known to have many long-term advantages. One advantage
would be the many investors that could be obtained within the corporation which will allow the
corporation to strive and continue. A corporation would also be able to obtain a large amount of
capital compared to a partnership by simply selling shares and issuing bonds, especially if the
corporation is publicly traded. The biggest disadvantage would be the likely double taxation that it
may face. This is done by a corporation paying taxes on its income and then the shareholders
having to pay taxes on the dividends it received from the corporation which would make double
taxation exist.
Therefore, if I was to open a construction company, I would make the decision to run it as a sole
proprietor due to the simple fact the construction company will be small which would make it very
manageable for one person to run.
There are times when a new client will come to our firm, and they are trying to decide what type
of entity to choose for their new business venture. To figure out what type of entity we need to
figure out what exactly the business is and typically what type of liability the owners will have or
need to have protected. A sole proprietorship is a business that an individual reports typically on a
schedule C or F on their individual tax return. On advantage is there is no other federal tax return
requirement since the information is reported in the individuals return. Some disadvantages are
that there can only be one owner and there is no liability protection for that person. A sole
proprietor can take money out of the business at any time since only the income and expenses are
reported on their individual tax returns.
A partnership can be defined as a general partnership, limited partnership, or a limited liability
company. An advantage to forming a general partnership is that entity can have two or more
members. [Another advantage is] a partnership is a tax reporting, but not taxpaying, entity
(Anderson, Hulse & Rupert 2023). Each partner gets a K-1 and the income is reported on their tax
returns. The positive side to getting a K-1 and reporting the income is that these members can take
money out of the partnership by taking tax free distributions. A disadvantage is that there is no
liability protection. The partners are all liable for any debts that the partnership cannot pay.
A C corporation has the best advantage as the shareholders do not have any liability to the
company personally. A C Corporation also have the biggest disadvantage which is the
shareholders cannot take distributions without getting double taxation. The only way a shareholder
can take money out of a C corporation is to take wages or to take taxable dividends.
The taxable entity I chose for the new business owner is a partnership. The business is investing in
large real estate transactions to be converted as rentals (for example, large apartment complexes).
This is the safest choice for a few reasons. They can choose a partnership to have the partners
liability be limited, which is beneficial if they start purchasing multiple large pieces of real estate
and have a sum of mortgage loans over $10,000,000. Another reason they should choose a
partnership is that they can take large distributions in income producing years that are not included
in income. The last benefit is that when the partnership is starting up the partners can deduct the
partnership loss on the k-1 to the extent of the partners basis in the total debt on the balance sheet.
For example, if there is a $10,000,000 debt on the balance sheet on the liabilities section the
partners can deduct a loss up to $10,000,000. If that loss is not met on the first year, they can keep
having a loss until the total debt is used (which hopefully does not happen, or they will not have a
profitable partnership).
One of the easiest and most inexpensive business to own is a small business or sole proprietorship
that usually is usually owned by and operated by one person. Sole proprietorships have no
employees and the income is generally reported on the individuals personal tax return as pass
through income. There is no distinction between the business and the owner which can be a
disadvantage to owning a sole proprietorship but you are entitled to all profits which can be
advantage. This downside to this as sole proprietor the owner is also responsible for the sole
proprietorship’s liabilities, losses, and debts which can be a disadvantage.
Since sole proprietors usually use their social security number to report their income from self-
employment but this makes it difficult to obtain funding for the business and build credit. This is a
disadvantage because the sole proprietor’s personal credit is not separated from the business credit
making it harder to determine credit worthiness of the actual business. This results in the sole
proprietor not being protected from any commercial debt, lawsuit, or obligations held under the
business another big disadvantage because the sole proprietor assumes the personal risk of
operating the business. z
Owning a sole proprietorship can have its advantages since they are quick, easy, and inexpensive
to form. There is no annual paperwork or state filings, which saves money and keeps startup costs
low. Since the income flows through the individuals personal tax return the owner is only
responsible for personal taxes on the federal, state and local (as necessary) and apart from FICA
and self-employment taxes owners don’t pay any business taxes or unemployment taxes.
Choosing to form a sole proprietorship is good for first time business owners who must grow their
business.
Longo, R. (2020, November 23). LLC or sole prop? which one is best for your business? Duquesne
Univ. SBDC. Retrieved February 1, 2023, from htps://www.sbdc.duq.edu/Blog-Item-Limited-
LLC-vs-Sole-Proprietorshipt
Partnerships
A more complex business a new business owners can form is a partnership. Partnerships are
formed by two or more people to offer a service or trade. Entering a partnership can offer several
advantages since each person contributes to the operation of the business. Partners usually
contributes a portion of their own money, property, or skill to contribute to the successful
operation of the business and partners share both profits and losses during the operation of the
business partnership.
Income from partnerships is reported as an entity and partners are required to file annual
information returns to repot the income or loss from the operation of the business as well any
eligible business deductions, gain, or loss incurred during the operation of the business.
Partnerships don’t pay any income taxes but the partners must report their share of the
partnership’s income or losses on their personal tax return.
Entering a partnership has its advantages by providing access to knowledge and best business
practices to mitigate risk and reduce potential mistakes in the operation of the business. Running a
partnership also increases efficiency as the costs of running the business are reduced between
partners but startup costs can still be costly. Partnerships also allow businesses to achieve long
term stability by creating more appropriate products and services through innovation and
collaborative efforts.
Partnerships do have their advantages but harder to form since they are expensive and more
challenging to form forming a disadvantage. The high cost to start partnerships are only the
beginning to the disadvantages in forming a partnership. If a conflict of interest arises this could
create a negative impact if the decision may be good for the business but unsettling to some
individuals involved if the decision doesn’t align with the individuals’ interests. This can create
conflict within the partnership if a common ground is not found which can make having a
partnership detrimental. Partnerships can also drain resources a partner fails to meet contribution
of time, money, skills or efforts which could lead to full dissolution if another’ partners resources
are depleted.
Choosing to form a partnership only works if the partners as a whole will benefit from the
contributions of each partner. When this happens the partnership will begin to see tangible added
value to partnership that will allow for growth of the partnership. Individuals should keep in mind
the when forming a partnership, the common and shared goals of the individuals partner. If the
individual partners goals don’t align long term stability is harder to achieve.
SDG Partnership Accelerator. (n.d.). Training and services. The Benefits and Risks of Partnering.
Retrieved February 1, 2023, from https://thepartneringinitiative.org/the-benefits-and-risks-of-
partnering/
irs.gov. (2022, November 2). Partnerships: Internal Revenue Service. Partnerships | Internal
Revenue Service. Retrieved February 1, 2023, from https://www.irs.gov/businesses/partnerships
Corporations
Corporations are some of the most advanced businesses an new business owner can form and the
most expensive as usually corporations are formed are legal entities separate from their owners.
The owners of the corporation are known as shareholders that bear no personal liability to the debt
of the corporation, only the amount invested into the corporation which is seen as one of its
greatest advantages. Corporations are usually large companies that offer a variety of goods and
services, significant employment, and stimulate economic growth. These are also some of the
primary advantages of starting a corporation but transitioning into a corporation from a small
business is usually seen as a long-term goal of owning a small business.
Corporations are usually one of the most expensive forms of business a new business owner can
form. The startup costs are usually very high and business owners who wish to incorporate must
apply at the state level and be approved to incorporate in the state they are applying to. This can
become challenging as many state laws vary on the incorporation of a business which can be a
major disadvantage if the business owner is unfamiliar with the state laws where they do business.
Another major disadvantage to incorporating a business is after the incorporation the business can
only engage in the activities for which the business was established making it difficult to expand if
the corporation wants to expand into activity for which it it not approved for established to do
business for.
It may be best to consider forming a corporation at the need of the business as it may not be
beneficial for tax purposes. The tax rate for corporations is usually higher and corporations are
taxed twice when reporting taxes. Corporations are taxed on a corporate level and taxed again once
dividends are issued to shareholders which can be a disadvantage when running a corporation if
the tax liability can’t be met.
WAHLEN, J. A. M. E. S. M., Jones, J. P., & Pagach, D. (2023). Chapter 15 Contributed Capital:
How Are Corporations Organized? In Intermediate accounting: Reporting and analysis (pp. 152-
154). book, CENGAGE LEARNING.
Example
As an accountant if a client approached me wanting to open freelance photography business, I
would recommend that my client open a Sole proprietorship. The startup costs will be low and
they will enjoy all the advantages of having a Sole proprietorship with very little exposure to the
disadvantages. Starting the business as a sole proprietorship will allow the business the room it
will to grow into a limited liability company, partnership, or even corporation. All of the profits
made in the business will go directly to the client and they will only be responsible for paying
taxes on the profits without worrying about paying additional taxes for the business which can lead
to undue burden if tax obligations are not met.
Anderson, Kenneth E., Hulse, David S., Rupert, Timothy J. (2023). Pearson’s Federal Taxation
2023 Corporations, Partnerships, Estates and Trusts. Pearson Education Inc. Hoboken, NJ.
Bragg, S. (2021, June 25). Corporation advantages and disadvantages. AccountingTools.
https://www.accountingtools.com/articles/corporation-advantages-and-disadvantages.html.
Business partnerships: What you need to know.
Business News Daily. (n.d.). https://www.businessnewsdaily.com/15746-business-partnership-
pros-and-cons.html.
SBA. (n.d.). Choose a business structure. https://www.sba.gov/business-guide/launch-your-
business/choose-business-structure
Truic. (2023). Single-Member LLC Taxes. https://howtostartanllc.com/taxes/llc-taxes/single-
member-taxes
Anderson, Kenneth, et al., editors. Pearson’s Federal Taxation 2023 Corporations, Partnerships,
Estates & Trusts. Pearson Education, Inc, 2023.
Fleischman, Gary M, and Jeffery J Bryant. “C Corporation, LLC, or Sole Proprietorship?
What Form Is Best for Your Business? Management Accounting Quarterly, vol. 1, no. 3, 2000,
pp. 18.
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