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Thinking about investing in a new business of your own? What form of business organization should you choose?
The three most basic forms of business organization are the sole proprietorship, partnership and corporation. Here is a summary of the pros and cons of each form.
Photo by laverrue, courtesy of flickr
Sole proprietorship
The Pros – A sole proprietorship is relatively easy to start and it is the least regulated form of business organization.
Since the owner is in charge of the business, conflicts between owners and managers will not exist. The income of a sole proprietor is taxed once. For example, if the business owner had income from a regular job and from business, then the income is lumped together and taxed once.
The Cons – Sole proprietorships have lives limited to the life of the proprietor. If the owner wishes to sell the business, it may be difficult to find a new, satisfactory owner so transfer of ownership can be difficult. The owners are also exposed to unlimited liability.
Partnership
Pros and cons are similar to that of a sole proprietorship, however the added help can provide some benefits. Having partners can increase the amount of access to start-up capital and spread the work.
Partners can be general or limited. General partners operate similarly to sole proprietors, in that they have unlimited liability. Limited partners have liability limited to the amount of their investment in the business. The income of partners is also taxed once. Many partnerships dissolve if any of the partners die, so the life of the business depends on the lives of its owners.
Corporation
The Pros - A corporation is treated as a separate entity. Just like people, corporations can make money, pay taxes and be sued. Since a corporation is its own entity, its owners are allowed limited liability. Corporations can outlive their owners and transfer of ownership is as easy as buying or selling shares of the company’s stock.
The Cons – The downside of being a separate entity is double taxation. A corporation is taxed on its income before any income can be shared with the company’s owners. If any income is shared with the owners (in the form of dividends paid to shareholders), the owners have to pay additional taxes.
The form of business you choose to pursue should depend on your plans for your particular business, here are a few questions you may want to answer before deciding with form to use:
What is your line of business? How much would it cost to start this business and who are your potential investors? Who would actually do the work? What is the potential for liability? What is the profit potential and how will it impact your taxes? Who are your competitors? How long do you want to be in business?
There are ton of questions that must be answered before a business is started, these are just a few. For more information on starting a business, visit entrepreneur.com.
