Why Sole Proprietorship Is the Best Form of Business Essay

Institute of Corporate Finance. “Sole proprietorships – definition, advantages and disadvantages.” Corporate Finance Institute, 2 July 2020, corporatefinanceinstitute.com/resources/knowledge/strategy/sole-proprietorship/. “Unlike a sole proprietorship or partnership, a corporation is a separate, separate and distinct legal entity from its owners” (Lau & Johnson, 2013). Companies offer many advantages to large companies that are otherwise not able to operate as partnerships or sole proprietorships. One of the biggest advantages of a business is that all owners or shareholders have limited liability protection. As with limited partners in a limited partnership, the best thing a shareholder could lose would be their initial investment in the partnership. Partnerships, sole proprietors, S corporations and LLCs do not pay corporate income tax because they are not separate objects of taxation. Instead, organizations “pass-on” profits to owners, who in turn report the company`s income or losses on their personal tax returns. In LLC and S companies, income tax is paid by the shareholders of the company themselves. Following the passage of the Tax and Employment Reduction Act, a new income tax deduction was introduced for these organizations (McKenzie and Smart 2019). By 2025, owners of partnerships, limited liability companies and S companies will have the option to deduct up to 20% of the company`s net profit for income tax. Capital companies or companies are legal persons distinct from the person or persons who set them up; Officers and directors buy shares in the corporation and have control over its operation. Constitutions therefore limit the liability of individuals in the event of litigation; Directors have no personal liability for the corporation`s debts.

Incorporation means the registration of companies in the company`s commercial register, so that it helps the board of directors and management take risks that support growth without affecting it. General partnerships are not without drawbacks. Without being a public company, owners are always subject to issues such as responsibility, control, and location. Many believe that liability is a bigger issue in a partnership than in a sole proprietorship. The owners of the company remain fully responsible for any debts that the company may accumulate, as well as liability for any lawsuit that may be brought against the company. The biggest problem in a partnership, however, is that now each partner can be held accountable for the actions of the other partner. A sole proprietorship is easy to set up and wind. The owner does not need any legal formalities to start a business and can even start with minimal capital. The simple incorporation process also facilitates the end of this form of corporation. It is at the sole discretion of the owner to form or terminate a sole proprietorship. In the sole proprietorship, no legal formalities are required when the company is created or dissolved, and therefore there is no legal entity.

Therefore, the law does not distinguish between owner and business; If the owner goes bankrupt or dies, it is the end of the business and it is dissolved (Corporate Finance Institute). The sole proprietorship has unlimited liability; The owner of the company is personally responsible for any debts and loans that the business may have. Finally, the company does not allow profit-sharing; This is because the company is owned by one person and all the profits the company makes belong to him alone. One of the disadvantages of a business is the difficulty of moving to new places. When the company is formed, its articles of association are filed as a national company in a single state. If a company wishes to do business in another state, it must be registered as a foreign company in each state. This is a very costly process that can significantly limit the company`s ability to expand or relocate its operations. There are a few drawbacks to owning a sole proprietorship that make it an imperfect type of business. Some of the disadvantages of this type of business are liability, income taxes, and the longevity of the business.

LLCs even facilitate business in other states. You said that you were planning to build a second plant in a neighbouring state. You should be eligible to do business in this state, which in most cases is as simple as filling out paperwork and paying fees, which are typically between $100 and $300 (Mancuso, 2013). Ease of commissioning isn`t the only great thing about an LLC. Another benefit is when it`s time to file taxes. Each year, an LLC can choose how it wants to be taxed; either as a corporation or as a partnership. This gives you the opportunity to choose the tax rate that works best for the business and take advantage of breaks you might not otherwise be able to enjoy. The company, which is considered a separate legal entity, is now liable for the income tax borne by the sole shareholder(s). One advantage of this is that corporate tax rates have historically been lower than income tax rates. These savings can be kept with the company to be used for business purposes. This does not mean that shareholders do not have to pay tax on the profits they make from a corporation; However, these profits or dividends are usually lower than the company`s profits. As a separate legal entity, a company also has the added benefit of longevity.

In a sole proprietorship or partnership, if one of the partners or the owner dies, the business dies with them. However, a company can continue without any problems after the death of one of the shareholders. This longevity leads to greater investor confidence without the risk of sudden closing of the transaction. Sole proprietorships are the most common type of business in the United States. They are most often chosen because they are the easiest type of business to start and give the sole proprietor of the business full control over the business. There are many advantages for a sole proprietorship in terms of control, profit retention, and convenience. In the United States, the main corporate taxes include corporate income tax, sales tax, property tax, and capital gains tax. Different types of businesses pay different types of taxes and are also entitled to different deductions and benefits. C companies pay taxes on all profits.

Typically, the tax is levied on the money the company uses to cover costs or losses. And also profit, which is distributed in the form of a dividend between the owners. This is done before taxes are paid, as each shareholder`s dividend income is taxed separately at the personal income tax rate. Despite many joys, the sole proprietorship has several limitations and disadvantages that the owner may experience. First, society has unlimited liability; Since the corporation cannot have a separate legal entity, the owner has unlimited liability for all of the corporation`s debts. This means that if the business does not meet its financial obligations, creditors can demand repayments and the owner may be forced to use his personal assets. Second, unlike a partnership, the owner does not share the loss with one person; You are fully responsible for any loss suffered by the Company. After all, sole proprietorships are limited in size, lack continuity, and capital is also limited. Like corporations, LLC members need to be careful about how they interact with the company. If LLC members do not treat the LLC as a separate entity, it may result in the loss of their liability protection. Members should remember that the profits of the business belong to the LLC and cannot be used for any reason other than in the best interest of the company.

Members of the LLC can only profit from their income from the corporation and cannot use the other profits for personal use. The owner is able to use the profits of the business for any use he deems necessary, as he would with his own money. All bank accounts belonging to the company would belong to the owner, even if they are in the name of the company. LLCs offer many useful benefits that would be great in your situation. As the name suggests, the best benefit for you is liability protection. If your business is responsible for the debt, the best thing you could be personally responsible for is your initial investment in the business. The LLC would be legally separate from you; Therefore, creditors would not be able to search for your personal assets to cover the company`s debts. Another advantage of an LLC is the ease of commissioning.

In most states, all that is required is the filing of the organization`s statutes with a small fee with the agency that controls the companies in the state. The sole proprietorship has various advantages that the owner can enjoy compared to other types of businesses, the following are its advantages: it is simple and easy to start and manage the business; This is because the process of starting a sole proprietorship requires little paperwork and little to no cost. Second, few government regulations are needed; Unlike other companies, this activity does not require resources such as financial reporting to the public (Corporate Finance Institute). Third, the owner can enjoy the profit made alone, the owner does not share the profit, unlike other businesses. Finally, less capital is required for sole proprietorships and there is a tax advantage; The tax is paid only once, unlike other companies. Like other businesses, partnerships have characteristics that distinguish them from other business entities, including: it is a contractual relationship; The partnership is only concluded if there is a contract between two or more persons/groups. According to the law on general partnerships, “the connection of the partnership results from the contract and not from the statute”. The contract may be concluded orally or in writing, or both; A verbal contract is sufficient, but it is usually more sensible to create a partnership deed that sets out the obligations, duties, rights and conditions of each partner.