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).
Sole Proprietorships
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.
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. d 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. 15–2-
15–4). book, CENGAGE LEARNING.
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.
