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Margaret Perez 8/20/2010 PA 202-01 Prof: David Barman MEMO: To: Attorney Phil Re: The Bulls Advantages of operating as a sole proprietorship: Sole proprietors have the advantage of being able to run their own business as they see fit. They don’t have to ask permission of others the make decisions regarding the business. A sole proprietor can hire as many employees as they need and give them whatever responsibilities’ they want. The cost of starting a sole proprietorship is low. You have to pay filing fees when you go to get a license and a certificate of an assumed name for the business, and also to insure the business. There are income tax benefits when you own a sole proprietorship, you can report on a schedule to the sole proprietor’s individual tax return. The profits and losses of the business are added to the sole proprietors other income and taxed at the individual rate of the taxpayer. Disadvantages of operating as a sole proprietorship: There is limited potential for growth when you own a sole proprietorship. There is no diversity in the management of a sole proprietorship because it is operated by one person whom makes all the decisions. Owning a sole proprietorship is risky because you are liable for anything and everything pertaining to owning and operating the business including all debts, torts, and employees. There is not much protection over the sole proprietor’s personal assets. Sole proprietors have a lack of business continuity because when they die so does the business, unless a family member or close friend keeps the business going. It is hard to sell a sole proprietorship because the business is so much a part of the owner. Usually the businesses tangible assets are broken down and sold that way. Also it may be harder for a sole proprietor to raise the funds for the materials they need to run the business because they have to borrow against their own line of credit. If the sole proprietor does not have enough capital they may not be able to start the business the way they desire. Advantages of operating as a partnership: There is more flexibility in the management of a partnership because there are two people managing the business and making decisions. There are minimal statutory formalities and reporting requirements in a partnership. It is always a good idea to write up a partnership agreement that discusses each person’s rights and responsibilities, but it is not necessary, a partnership can be formed by a verbal agreement between two or more people and can be implied by behavior. There are no minimum capital requirements for starting up a partnership, and the fees incurred are lower than the cost of starting a corporation. There are income tax benefits when you own a partnership, you can report on a schedule K-1 to the partner’s individual tax returns. The net income or loss of the partnership is passed through the partners according to statute or what the partnership agreement states. With a partnership there is a greater opportunity to gain capital for the business because there are two or more people who can invest their money and take out loans under their credit to invest into the business. Limited liability partners have an advantage over general partners because they don’t have to risk their personal wealth and assets. Disadvantages of doing business as a partnership: General partners are not protected under limited liability and are personally responsible for debts, obligations, and torts committed by or on behalf of the partnership. There can be problems when it comes to managing a partnership because there is more than one person making decisions and they may not always agree. There is a lack of business continuity because as soon as one person ceases to be a partner the partnership dissolves. A partner may not sell or transfer their part of the business to another person unless all partners sell or transfer the business. Partners are limited to the amount of capital they can obtain; they can only use their own personal wealth or loans they have obtained in their names. There are significant legal and filing fees associated with opening a partnership. Because partners are taxed at their individual tax rate, they may incur a loss if they have other income and are in a higher tax bracket. Advantages of doing business as a corporation: Doing business as a corporation offers limited liability to its shareholders, directors, and officers, because a corporation is responsible for its own debts and obligations. Corporations are able to offer their employees benefit plans to compensate employees and reduce the income tax liability of the corporation. Corporations, except S Corporations can choose their fiscal tax year. Owning a Corporation offers business continuity, the corporation does not dissolve upon the death or withdrawal of any of its shareholders, officers, or directors. Corporations have the ability to raise capital through obtaining investors to buy stock in the company. Corporations have a centralized management, shareholders vote for the directors of the corporation. The directors elect officers to operate the day to day business of the corporation. The ownership interest of a corporation is easily transferred to a new owner. Shareholders can sell or transfer their stock by signing the back of the stock certificate over to the new owner. Disadvantages of doing business as a corporation: There are numerous formalities and reporting requirements associated with forming and maintaining a corporation. Corporate entities are taxed twice; the entity is taxed as well as the shareholders earnings. Corporations are subject to special state taxes and taxes in other states they conduct business.
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