There are three types of common business formations; Sole
Proprietorship, Partnership, and Corporation. a 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: a 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. 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: 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. a This also is in line with the control that the
partner has. A partner with limited liability usually has limited control
within the company. a The profits of the business are passed through
to personal tax returns. The partner without the limited liability must
also pay self-employment taxes. a 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: a 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. 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. a Shareholders will not be able to withdraw the profits
without recognizing it as income.
The business I choose is a Maple tree farm. a 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. a The
owner knows that all profits and losses will be on the personal tax
return. Profits will be taxed as the owners tax rate.
References:
SBA. (2023). Choose a Business Structure. Retrieved from
https://www.sba.gov/business-guide/launch-your-business/choose-
business-structure
