Your choice should be wise while choosing your business category whether Proprietorship, a Partnership, or a corporation. Every kind of activity you are engaged in has some specific advantages and disadvantages. Your home-based business involves choosing the legal structure such as Sole proprietorship, Partnership, or Corporation.
Apart from the government reporting and tax purposes, choosing a business wisely can enable your business to operate more efficiently. As each legal firm has its own unique characteristics, your goal is to choose which form of business is best for you. The decision of determining the goods and services that the company will go to offer depends on the type of Business.
Although, there is no right or wrong choice that we can say that you should choose this business activity, all you need to understand the advantages and disadvantages of each legal business structure so as to opt the best option which can meet your needs.
Table of Contents
Understanding the importance of Business Structure
1. Sole Proprietorship
Sole Proprietorship is the business which is owned by One Person who is solely entitled to all its profits and responsible for all of its debts. The owner of these firms is usually, the individual who has day-to-day responsibility for running the business as he/she owns all the assets of the business and the profits generated by it. He also has the complete responsibility for any of its liabilities or debts. In other words, the law treats the business and the owner as one and the same.
Partnerships and corporations may lessen their tax liability, by the way, of a myriad of business expenses and other tax avoidance techniques. These kinds of a tax deduction may not be applicable to a sole proprietorship. Besides, it has a potential for growth in comparison with that of a corporation. Sole proprietorships tend to have more difficulty in obtaining capital as well as holding on to key employees.
Advantages of Sole Proprietorship
- You are the “Boss”
- It is easy to get started
- All profits kept by you.
- Income and business are taxed as personal income.
- You can discontinue your business at will.
Disadvantages of Sole Proprietorship
- Your Liability is unlimited.
- Amount of investment capital raised by you is limited.
- You need to be a generalist.
- Retaining high-caliber employees is difficult.
- The life of the business is dependent on the owner.
Any business which is owned by two or more people and agrees to share in its profits is said to be a Partnership. Like sole proprietorships, the laws do not distinguish between the business and its owners. It is mandatory for the partners to have a Legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how can the partners be bought out, or what steps should be taken to dissolve the partnership when is in need.
The partners must also decide up front how much time and capital each will be contributed. Its tax structure is the same as a proprietorship except in the profits and losses of the partnership which will be divided by an agreed percentage by all the partners.
Advantages of Partnership
- Two heads are better than one
- It’s easy to get started
- More investment capital is available
- Partners pay only personal income tax
- High-caliber employees can be made partners
Disadvantages of Partnership
- Partners have unlimited liability
- Partners must share all profits
- The partners may disagree
- The life of the business is limited
A corporation is different from the other legal forms of business in that the law regards it as an artificial being possessing the same rights and responsibilities as a person. This has an existence separate from its owners. Moreover, it has all legal rights of an individual in regards to conducting commercial activity.
It can sue and to be sued by any other legal entity. It can also have own property, sell the property and sell the rights of ownership in the form of exchanging stock for money. Shareholders are the owners of a corporation. It is in the hands of the shareholders to elect the board of directors to oversee the major policies and decisions. The corporation has its own life and does not dissolve when ownership changes.
Advantages of Corporation
- Stockholders have limited liability
- Corporations can raise the most investment capital
- Corporations have unlimited life
- Ownership is easily transferable
- Corporations utilize specialists
Disadvantages of Corporation
- Corporations are taxed twice
- Corporations must pay capital stock tax
- Starting a corporation is expensive
- Corporations are closely regulated by government agencies
However, a Corporation is relatively more difficult to create, organize and manage. There are more reportorial requirements with the stock exchange.
This article has been contributed by Sarubpreet Kaur who is a content writer with LegalRaasta.