I need some assistance defining the pros and cons of general corporations, Subchapter S Corporations, and Liability Corporations.
Also, when an entrepreneur starts a new business what choice of business is the best:
- Sole proprietary
In response to the first question, some of the advantages and disadvantages for corporations include the following:
* the corporation is considered a legal entity, with owners consisting of shareholders, represented by a board of directors, who manage the executives toward desired goals and levels of performance. All of these people report ultimately to shareholders (the true owners of the firm) in terms of the amount of equity they own in the company.
* the corporation is responsible for paying taxes on its reported earnings at the going corporate tax rate which currently averages in the USA about 37%
* if dividends are paid to shareholders, then the shareholders must pay taxes on the dividends received as earned income --- this represents a form of double taxation to the ultimate owners of the corporation
* the corporation has limited liability as it relates to the owners, based upon the amount of investment of each owner --- they are not liable for any losses exceeding their original investment
* the S corporation operates much like a partnership in the sense there is no double taxation, and the owners are taxed only once based upon the earnings distributed to the owners
* the reference above probably really means a limited liability partnership (LLC), which again restricts the amount of liability for the owners of the business to the amount invested, thus limiting their individual exposure to claims in excess of their original investment. Corporations, by their very nature, have a limited liability circumstance as outlined above.
In summary, the primary considerations when viewing different forms of corporations deals with the areas of liability and taxation. In addition, there are reporting requirements to the owners which must be met, and if the corporation is publicly traded, then there are reporting requirements which are designed to provide all information on a transparent basis across the board to owners, potential investors, and the financial community in general. From a funding standpoint, the corporation has alternative funding sources not generally available to sole proprietorships or to partnerships.
A sole proprietor is essentially a person who wishes to own their own business enterprise. As such, they are responsible for all of the functions of the business, including financing, marketing, sales, staffing, purchasing, and the like. They have total liability for the entire business, meaning that if the business fails, they are liable for paying off creditors as a result of their ownership position. But they also have total authority for decision making relative to the business. They will also be taxed as an individual for all reported earnings from the business. This category represents the largest business form in the country today.
Partnerships are represented by two or more people who join forces to establish a business, and who contribute to the business in either equal parts, or in varying levels, but who share the responsibility for all of the decision making and operation of the firm. Usually, these individuals have areas of expertise which allow the partners to realize synergies based upon creating more than the whole through these areas of knowledge, experience, etc. They may or may not share equally in the distribution of profits from the firm, but their tax obligation will be the same as the sole proprietor --- they are responsible for paying taxes based upon their individual circumstances. Again, unless established as a limited liability partnership, all of the partners ...
A discussion of the pros and cons of the various business forms, including details regarding the most important factors which can influence the decision on how to structure the business.