Proprietorship, partnerships, and corporate tax entities all provide various advantages and
disadvantages for business owners. Sole proprietorship are 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 don't 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 also provide similar benefits as partnerships.
Business owners have to 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 similar to 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 or not the partners actually 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 similar to proprietorships.
There are three types of common business formations; Sole Proprietorship, Partnership, and
Corporation. The type of business structure that is chosen is important because those effects how
much the business pays in taxes, the ability to raise money, the paperwork that the business will
need to file and the owners personal liability.
Sole proprietorship: this type of business is easy to form and gives the owner complete control.
A sole proprietorship does not need to have a separate business entity and are not subject to
taxation as a separate entity. Profits however are taxed to the owner of the business. Tax rates
for a corporation are typically lower than that of a individual tax rate. This means that assets and
liabilities are not separate from personal assets and liabilities. d This also means that on the other
hand the owner is liable for debts and obligations of the business. You are still able to get a trade
name with this structure. One of the disadvantages is that it could be hard to raise money as well
as borrow money. Banks are hesitant to lend to this type of structure.
Partnership: d Partnerships are good for structures that have two or more people that want to own a
business together. A limited partnerships (LP) and limited liability partnerships (LLP) are the
two options to choose from with this structure. With an LP, there is one general partner that has
unlimited liability. The remaining partners have limited liability. This also is in line with the
control that the partner has. d A partner with limited liability usually has limited control within the
company. The profits of the business are passed through to personal tax returns. The partner
without the limited liability must also pay self-employment taxes. The tax rate has the potential
to be lower with is an advantage and it is not subject to double taxation which is possible with a
corporation.
An LLP is very similar; however, the limited liability is for every owner. The LLP protects each
partner from debts and won’t be responsible for the actions of the other partners.
Corporations: This is the structure that has the legal entity sperate from its owners. They can
make a profit, be taxed, and can be held legally liable. d This structure has the strongest protection
to its owners. There is also a higher cost in forming this type of business and will have more
extensive record-keeping, operational processes, and reporting. Corporations pay income taxes
on their profits, which is often taxed on the profit and then when the dividends are paid to
shareholders. Shareholders will not be able to withdraw the profits without recognizing it as
income.
Maple tree farm the potential owner of this business just bought 50 acres of land that is all
wooded and a great potential for being successful in making and selling maple syrup. I choose
this company to be a sole proprietor because it is the first time that they owner has even been in
business and will be starting from the ground up. This will give the owner the opportunity to
build the business and figure out if it will be a thriving business. The tax forms will be simple
while the owner is figuring things out. The owner knows that all profits and losses will be on the
personal tax return. Profits will be taxed as the owner’s tax rate.
References:
SBA. (2023). Choose a Business Structure. Retrieved from https://www.sba.gov/business-
guide/launch-your-business/choose-business-structure
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
