Compare and contrast the following forms of business organization: sole proprietorship, general partnership, limited partnership, limited liability company, and corporation as to ease of formation, liability of owners, management, and tax implications

Answer 1

A sole proprietorship is an unincorporated business owned by one person. It is easy and inexpensive to create and operate. However, the owner has unlimited personal liability for the debts of the business. The owner has the right to manage the business. Business income is taxed on the owner's personal income tax return; the company does not have to file a separate tax return. A general partnership is an association of two or more co-owners to operate a business for profit. Partnerships are easy to form and do not require filings with the government, although a written partnership agreement for use between the parties is recommended. A disadvantage of general partnerships is the unlimited liability of partners. Partners have joint and several liability for partnership debts. Unless otherwise agreed, partners have equal rights to manage the business. A partnership does not pay taxes itself; all income and losses are passed through to the partners and reported on their personal income tax returns. Limited partnerships have at least one general partner, who has unlimited liability but the right to manage, and at least one limited partner, who has limited financial liability but few management rights. A limited partnership must file a certificate of limited partnership with its Secretary of State, so formation is not as easy as for sole proprietorships or general partnerships. Limited partnerships, like general partnerships, are not taxable entities. Limited liability companies generally require two documents: a charter and an operating agreement. The charter must be filed with the Secretary of State. The operating agreement sets out the rights and obligations of the owners/members. All members have limited liability, and the business has the tax status of a partnership. Corporations are relatively expensive and difficult to form, but owners have limited liability. Generally, the owners/shareholders are not involved in the management of the company. Corporations are taxable entities, so they must pay taxes and file returns. The owners/shareholders must also pay tax on dividends they receive from corporations.