BUS607 Assignment Week 1 Business Entity Comparison

Name

AUGC

BUS607: Business Law for the Accountant

BUS607

08/08/2022

Business entities comparison

Sole Proprietorship

Formation

A decision on a new business name that another company or organization hasn’t already used is made. Registration of the company name with the municipal, state, or federal authorities is done. Determination of which permissions and licenses are required by local, state, and federal authorities is done. As a result, a company will be subject to regulations such as health and safety, taxation, and other government mandates.

Termination

The business is terminated when: The owner passes away, another individual or group of people acquires the company, the firm is no longer run by its original owner and the owner files for bankruptcy.

Ownership type

In a sole proprietorship, the firm is owned and run by a single person who is not separated legally from it, so he gets to keep all the earnings, but he also has to take on all the financial obligations, such as debt.

Taxation

Personal income taxes apply to sole proprietorships. If the firm makes a profit, the owner must pay taxes on it as personal income.

Owner liability

Limited liability does not apply to sole proprietorships. As a result, the lone owner is liable for all damages. For this reason, the business’s single owner is personally obligated to pay all of the company’s obligations and costs. If a lawsuit is filed against the single owner of the firm, they might lose their assets.

Advantages

•      This kind of company structure has fewer stringent startup requirements than a partnership, an LLC, or a corporation.

•      As the simplest type of company organization, the sole proprietorship is preferred by small­time entrepreneurs since it is an affordable method to run a firm.

•      When you own your firm, you have complete control over every aspect.

Disadvantages

•      A significant issue for single proprietors is that they bear the entire responsibility for the debts and obligations of their company.

•      It might be difficult for solo entrepreneurs to obtain money, given that they have no company partners.

•      A person’s capacity to borrow money under this business model solely depends on asset value.

Partnership

Formation

Two or more persons join forces to start a firm and decide to share the company’s risks, gains, and losses as a group.

Taxation

The income tax paid by the partnership is distributed to the partners, who then submit a tax return to the board. Partners pay taxes on their portion of partnership profits or losses. The partners get a Schedule K­1 from the company’s taxable income for the year.

Owner liability

A general partnership entails limitless personal responsibility for each member. All participants in a partnership are jointly and severally liable for the business’s debts, as stipulated under the partnership agreement (Shaked,2021).

Termination

It is deemed terminated if no portion of the business, financial, or partnership activities remains. A partnership may be terminated or wound up by selling the partnership’s holdings, paying its obligations, and distributing any remaining money or property (Shaked,2021).

Ownership type

Having two or more individuals share ownership of a firm and responsibility for managing it and its profits or losses is known as a partnership.

Advantages

•      Having the capacity to pool resources may increase your company’s capital and provide access to fresh investors while making it easier for you to get loans.

•      You may meet new people and broaden your professional network with colleagues.

•      Bringing in new partners might help you view things from a fresh perspective, opening up new possibilities for your organization.

Disadvantages

•      An essential downside of a partnership is that all members participate in the business’s profits, debts, and risks.

•      Sole owners accustomed to running their firm may find that transitioning to a partnership business is a bit of a culture shock.

•      When more than one individual is involved in a business decision, conflict is possible.

Limited Liability Company

Formation

The “articles of organization,” a document including fundamental information such as the name of the company, its address, and its members, must be filed for an LLC to be formed. An associated filing fee is required in most states when filing with the Secretary of State. In most states, an Operating Agreement is a next step. Although not needed, strongly suggested for multi ­member LLCs. Additional business licenses and permissions must be acquired after the registration of the business.

Ownership type

Members are the proprietors of a limited liability company (LLC). Alternatively, members might designate one of the partners to handle the company’s day­to­day activities.

Alternatively, the members have the option of hiring managers.

Termination

LLCs are treated as partnerships for taxation purposes if their company is ended and its resources are dispersed to their members (Goff,2020). The LLC is also dissolved for tax purposes if the LLC’s firm is continued in another form, such as a corporate or sole proprietorship.

Taxation

In addition, LLCs provide a wide range of tax treatment options. The Internal Revenue Service (IRS) does not see LLCs as independent tax entities. As a result, depending on your LLC members, you’ll need to file your LLC taxes as either a sole proprietorship or a partnership (

Goff,2020).

Owner liability

As the name implies, owners and members of an LLC are shielded from personal responsibility for the company’s conduct. Members of an LLC are protected from personal responsibility, which means that the company’s debts can’t be recouped from their assets.

Advantages

•      There are no limitations on who owns what.

•      Possession of the ability to account using the cash technique.

•      An LLC member’s membership interests may be transferred to a living trust.

Disadvantages

•      Medicare and social security taxes apply to all profits.

•      For business owners, profit recognition must be quick.

•      There are fewer non­cash rewards.

Corporation

Formation

Registration of the company with the state where it’s conducting business. Creating the Articles of Incorporation, submitted to the state where the company has been registered, follows.

After that, the by­laws of the company should be drawn up.

Termination

Since the company is still liable for litigation, it must be kept up with all the state registration and other legal responsibilities. Once it’s decided to shut the business, there’s a need to file all of the proper paperwork.

Owner liability

Regarding corporate indebtedness, shareholders are generally shielded from any personal liability on their part. To recoup their obligations, lenders must seize the company’s assets.

Taxation

Taxes must be paid at a corporate tax rate on any profits the company makes. Anticipate the amount of tax payable for the year and submit quarterly payments by the 15th day of the fourth, sixth, ninth, and tenth months of the tax year if a company will owe taxes

Ownership type

A corporation is a legal company controlled by its shareholders and governed by a board of directors. Shareholders are not responsible for the company’s behavior or finances; only the corporation is.

Advantages

•      Similar to other forms of companies, corporations shield their stockholders from responsibility.

•      As a corporation, it will be simpler for a company to obtain money from investors since it may sell shares in the company.

•      To a lesser extent than individual income, corporate earnings are subject to taxation.

Disadvantages

•      The process of forming a corporation is time­consuming and costly.

•      Unlike LLCs, corporations are subject to many levels of taxation: federal, state, and even municipal.

•      The shareholders are responsible for paying taxes on the dividends they get from their company.

Cooperative

Formation

Cooperatives are the result of people working together to tackle a shared issue. A cooperative should function when the solution developed via collective activity results in exclusive advantages being delivered to members.

Termination

Ownership of a cooperative may only be terminated at a gathering of the organization and only if at least 80 percent of the votes in the organization are allotted to proprietary leaseholders of cooperative interests or if the declaration stipulates a higher proportion.

Taxation

The following cash and qualifying retained patronage cooperatives are taxable at the standard corporation rate.

Owner liability

Shareholders in a cooperative are protected from personal culpability for the costs and responsibilities of the company, even if other shareholders or workers have committed illegal conduct (Schaars,2018).

Ownership type

The “member­owners” of a cooperative own the firm. In contrast to a standard corporation, where every shareholder has a say in managing the company, co­ops are democratically governed by the members who own the firm (Schaars,2018). The co­services and products profit and serve the co­members.

Advantages

•      Companies may provide goods and services to underserved population segments by forming cooperatives.

•      As a result of the cooperative structure, a firm might be more stable and resilient.

•      Workers are guaranteed financial stability and progress.

Disadvantages

•      When it comes to obtaining finance, cooperative enterprises have less of an incentive for huge investors. Consequently, they don’t pique the interest of those high­net­worth individuals.

•      Investors of all sizes choose to steer away from them because they understand that the amount of their contribution does not define the magnitude of their impact.

References

Eshel, I., & Shaked, A. (2021). Partnership. Journal of theoretical biology, 208(4), 457­474.

Zeuli, K. A., Cropp, R., & Schaars, M. A. (2018). Cooperatives: Principles and practices in the

21st century.

Gazur, W. M., & Goff, N. M. (2020). Assessing the limited liability company. Case W. Res. L.

Rev., 41, 387.