Proprietorship, partnerships, and corporate tax entities all provide various advantages and
disadvantages for business owners. Sole proprietorship is used for single business owners are easier
to setup than other tax entities. However, they provide liability insurance for any issues they may
arise. The businesses assets and liabilities are not separate from personal assets and liabilities and
do not provide liability insurance in comparison to some partnerships.
Partnerships are commonly Limited Partnership and Limited Lability Partnerships and are created for
multiple business owners. Limited partnerships offer unlimited liability to one general partner and
limited liability to other partners. Profits flow through to the general partners tax return with no
limited liability and profits flow through the other partners with limited liability. Unlike sole
proprietorships, these taxable entities are used for multiple business owners and can be beneficial
for companies such as accounting firms, law firms and financial advising businesses.
Corporations are a taxable entity that can provide better protection to the owners by having the
corporation held legal liable. Corporations pay income tax on their profits and owners’ assets and
liabilities are separate. Corporations have shareholders that can hold equity in the corporation and
have an easier time finding investors than other taxable entities. S Corporations can avoid the
double tax that corporations can have and allow profits and losses to passed through to owners.
Corporations provide more protection to owners and provide similar benefits as partnerships.
Business owners must come the decision of choosing how they want their businesses to be taxed
and held liable. An example of this could be a law office with two owners that want to setup a
business together. They could form a partnership and that has the profits and losses passed through
to the individual returns like a sole proprietorship. "For tax purposes, all of the income of the
partnership must be reported as distributed to the partners, and they will be taxed on it through
their individual returns. This is true whether the partners received their shares of the
income..."(Nelson,2020). Forming the correct business entity helps owners with tax benefits that
they might not see otherwise. Partnerships can avoid the double tax of corporations while having
profits and losses pass through the owners like proprietorships.
References:
Sole proprietorships, partnerships and llcs are commonly used entities. Back to top. (n.d.). Retrieved
February 2, 2023, from https://www.wolterskluwer.com/en/expert-insights/sole-proprietorships-
partnerships-and-llcs-are-commonly-used-entities
