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Understanding Business Ownership: Pros and Cons of Sole Proprietorships, Partnerships, and Corporations

This comprehensive overview explores different forms of business ownership, including sole proprietorships, partnerships, and corporations. Each structure's advantages, like ease of setup, full profit retention, and flexibility, is balanced against disadvantages, such as unlimited liability and succession issues. Key financial implications like tax burdens and liability in case of lawsuits are analyzed using real scenarios. Finally, we discuss the strategic choices business owners face, whether expanding, retiring, or managing legal disputes, providing clarity on the best paths forward.

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Understanding Business Ownership: Pros and Cons of Sole Proprietorships, Partnerships, and Corporations

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  1. Forms of Business Ownership Leslie Lum Bellevue Community College

  2. Categories of Companies

  3. Advantages Easy to set up Control Retain all profits Flexibility Privacy Pension benefits Disadvantages Typically small business Limited financial resources Lack of critical mass Unlimited liability Succession problems Sole Proprietorships

  4. Types of Partnerships • General • Limited • Master Limited

  5. Advantages Easy to form Taxed at personal rates Pooling of talents Easier to get financing Disadvantages Unlimited liability Shared liability Interpersonal problems Competition for positions Partnerships

  6. Types of Corporations • C Corporation • S Corporation • Limited Liability Company

  7. Corporate Structure • Shareholders - Individual, institutional • Board of Directors • Officers • Corporate Charter • Stockholder’s rights

  8. Advantages Limited liability Liquidity Access to more sources of financing Unlimited life Disadvantages Reporting requirements Vulnerability to take-overs High tax rate Double taxation to shareholder Corporations

  9. Corporations and Double Taxation Profits before taxes $500,000 Sole Proprietor Gets all of profits Taxed at individual rate Partners Divides profits Taxed at individual rate Corporation is taxed Divides profits Taxed at individual rate • $500,000 • 100,000 20% tax • $400,000 total • $500,000 divided by 5 partners = $100,000 each • 20,000 20% tax • $ 80,000 each or • $400,000 total $500,000 -175,000 35% Corporate Tax $325,000 Divided by 100 shareholders $3,250 - 487.50 15% Personal Dividend Tax $2,762.50 each or $276,200 total

  10. New Business Called Biz.Com • You have three options • Sole proprietorship • Partnership with one other person • Corporation

  11. Biz.Com - Your share of Profits is $100,000 • Individual tax rate is 20% Corporate tax rate is 35% Dividend tax is 15% • As a sole proprietor how much do you take home after paying the taxman? • As a partner how much do you take home? • As a corporation how much do you take home?

  12. Biz.Com - You have a great product idea but nobody else in the company thinks it will work. • As a sole proprietor what happens? • As a partner what happens? • As a corporation what happens?

  13. Biz.Com - Someone sues you for $1 million because your product turned their hair green. The company is worth $0.5 million. • As a sole proprietor what happens? • As a partner what happens? • As a corporation what happens?

  14. Biz.Com - You want to expand your company by acquiring another company. The other company will cost $2 million. • As a sole proprietor what happens? • As a partner what happens? • As a corporation what happens?

  15. Biz.Com - A competitor wants to take you over • As a sole proprietor what happens? • As a partner what happens? • As a corporation what happens?

  16. Biz.Com - You want to retire to California. • As a sole proprietor what happens? • As a partner what happens? • As a corporation what happens?

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