In any business structure, there are three main structure topics; Sole proprietorship, Partnership (General and Limited), and a Corporation. Each of which has both disadvantages and advantages for any entrepreneur. In this report, we will discuss the difference between a sole proprietorship, partnership (general and limited), and a corporation.
A sole proprietorship like any type of business structure is formed by an entrepreneur and is the simplest form of business structure. The owner of the business is the business itself and is the most common form of business in the U.S. today. When creating a sole proprietorship there are no expensive federal or state government approval fees or government approval of that level. What there is are some local governments or counties in states that require businesses to register within that county for the type of business. In the initial investment as a sole proprietorship if the business would happen to fail then all the investment (capital) that was put into the business goes with it. However, in the event when the business fails and all costs are not covered by the initial capital the sole proprietor has unlimited personal liability. This gives creditors and banks the right to go after the sole proprietor’s personal assets. Also, at the end of the year the sole proprietor must prepare a personal income tax form 1040 U.S. individual income tax return for federal income tax purposes (Cheeseman. 2013. P.532.). When filing taxes this way gives the sole proprietor the option to write-off anything that was therefore purchased for the business or lost; this is also known as a Schedule C.
A general partnership or “ordinary partnership” is known as a voluntary business of two or more people who partake in the business (Cheeseman. 2013. P.533). This type of partnership can be done if there are more than one initial investors, but only one person wishes to run the business itself while the rest earn profit from it. However, with any loss in the business or if the business were to fail then all initial investors would become liable for the debt and/or obligation of the partnership. “An ordinary partnership can operate under the names of any one or more of the partners or under a fictitious business name” (Cheeseman. 2013. P. 533.). The difference between a sole proprietorship and partnerships, in general, is they do not have to pay federal income taxes. However, what they have to do instead is file the gain or loss under general filing. In any general partnership, the parties invested have a right in obtaining their initial investment back if so forth written in the agreement. If not, then in some partnerships can cause what’s called tort liability.
A limited partnership is similar to that of a general partnership. However, when two parties only want to invest their money and not be personally liable for any of the partnership's debts and obligations it becomes a limited partnership. The limited partners do not have any say in the management of the business itself whereas a general partnership does. Another difference between a limited and a general partnership is limited partnerships are required to execute and sign a certificate of limited partnership to make the agreement legal and binding. After the certificate is executed and signed the partnership must also keep it current by filing it with the same offices where the certificate was originally filed for creditors. If the certificate is not filed correctly the limited partnership can become a defective formation making all parties a general partnership and, therefore, liable for any loss in the business. An advantage for a limited partnership is a new partner may be added later on so long as all the partners agree to it.
Corporations are just as common as sole proprietorships. The only difference is a corporation is made up of shareholders and the one with the most shareholders is known as the CEO or chief executive officer of the company. Corporations have the option of being a publically traded company or being a private company. Also, when it comes time for filing taxes, creating a name there are several big differences between a corporation, partnership, and sole proprietorship. A proprietor is single taxed by the gains or loss. A partnership is also single taxed but taxed by each partner. A corporation is double taxed because it can necessarily have as many owners as the number of shares they have. Corporations when looking at companies to distinguish the difference is the name of the business itself. For example, Howard & Sons would be known as a partnership and Roehl Transport Inc. would be known as a corporation.
Reference Page
Cheeseman, H. (2013). Business Law, Custom Seventh Edition. [VitalSource Bookshelf Online]. Retrieved from https://itt-tech.vitalsource.com/#/books/9781256881605/