Legal Forms of Business

Abstract

The best attribute about America is any person can open a business without borders or obstacles. What differentiates a company is the type of business form they choose. This writer will analyze different business forms and how each form would apply in a business scenario.

Legal Forms of Business

Introduction

Establishing a sole proprietorship is cheap and relatively uncomplicated. In comparing business structures like a General Partnership, a C-Corporation, and an S-Corporation, a sole proprietorship is not legally separate from the person who owns it; therefore the sole proprietor must report income or losses on his or her income tax return. By contrast the law provides business owners in an LLC or LLP, limited liability regarding business misdeeds. A sole proprietor is responsible for withholding the proper taxes from any sale and setting it aside for quarterly tax payments and tax payments to Social Security and Medicare. Regarding personal liability, if a sole proprietor faces a lawsuit for causing harm to another individual, they are given no insulation against losing their bank account balance or personal assets.

Sole Proprietorship

Arthur is a part-time photographer who takes pictures for high school senior proms and dances. He also dabbles in weddings and baptisms. Arthur does not advertise his photography business because it is a start-up. He develops his own pictures and has morphed his garage into a dark room. Furthermore, Arthur has no board of directors, investors, or shareholders. However, because Arthur is a sole proprietor, he assumes all debt, risk, and liability. If a customer or vendor sues Arthur, he risks losing his personal assets to cover all losses. A sole proprietorship is not protected by corporation by-laws.

The financial statements that are associated with a sole proprietorship are the income statement, balance sheet, statement of owner's equity, and the cash flow statement. Because the sole proprietorship is not a corporation and is operated by one person, he or she accepts total liability on all debts. "The balance sheet of statement of financial position reports the financial position of a business, including a sole proprietorship, at a specific point in time" (Roberts, 2011, p.1). The net income statement depicts earnings for a sole proprietorship for a period of time. The statement of owner's equity acts as a bridge between the net income statement and balance sheet. This writer will argue that the statement of cash flow is the most critical financial statement to a sole proprietorship because positive cash flow reflects good business flow and longevity.

General Partnership

A general partnership is a joint venture between two or more people who have agreed to start a business together. A general partnership is similar to a sole proprietorship regarding ease of creation and low cost start-up fees. Basically, a general partnership starts when the business begins daily activities. In partnerships, there is no state filing fees, ongoing state fees, or franchise taxes. Like a proprietorship, personal assets are not required to be separate from business assets. Judy accepts the lack of corporate privileges that a partnership offers and joins the business. The difference between a sole proprietorship, and a partnership is within a partnership all profits and losses flow through the partner's tax return. General partnerships do not face double taxations like corporations.

Some advantages of a partnership include an increase in the ability to raise funds, allowing employees to become potential partners, an increase in skill levels and knowledge and are cost-effective. Disadvantages of a partnership can include partners being jointly and individually liable for each partner's actions, how profits are distributed, limited life of the business, future growth limits, and most the most critical component, unlimited liability. Additionally, the four financial statements; balance sheet, net income, statement of owner's equity, and the cash flow statement are essential accounting practices for any organization. In the income statement for a partnership, which is different from other income statements, profits and losses flow through each partner. The balance sheet for a partnership is similar to a sole proprietorship. The statement of owner's equity includes equity shared by each partner. Furthermore, the equity is appropriated based on each individual's ownership percentage. According to Banks (2010), "Most importantly, the general partnership entity is set up so that all partners are individually liable for expenses and losses to the company" (p. 1).

C-Corporations

A major distinction between a s-corporation and a c-corporation is within a s-corporation; the profits are passed to its shareholders and taxed under personal tax returns. In a c-corporation, profits are taxed separately form its owners. Additionally, some benefits of a c-corporation include low