SOLE PROPRIETORSHIPS PARTNERSHIPS CORPORATIONS

Introduction

SOLE PROPRIETORSHIPS PARTNERSHIPS CORPORATIONSA sole proprietorship is a type of business entity that is owned and run by one individual or one legal person and in which there is no legal distinction between the owner and the business. The owner is in direct control of all elements and is legally accountable for the finances of such business and this may include debts, loans, loss etc.

A Partnership is defined as the relation between two or more persons who have agreed to share the profits according to their ratio of business run by all or any one of them acting for all. This definition superseded the previous definition– “Partnership is the relation which subsists between persons who have agreed to combine their property, labor, skill in some business, and to share the profits thereof between them”.

A Corporation is a company or group of people authorized to act as a single entity (legally a person) and recognized as such in law. Early incorporated entities were established by charter (i.e. by an ad hoc act granted by a monarch or passed by a parliament or legislature). Most jurisdictions now allow the creation of new corporations through registration. Registered corporations have legal personality and are owned by shareholders whose liability is limited to their investment. Shareholders do not typically actively manage a corporation; shareholders instead elect or appoint a board of directors to control the corporation in a fiduciary capacity.

Publication Details

A partnership business automatically begins when two or more people decide to go into business. Sole proprietorships begin automatically when a single business owner decides to open a business. There are no documents to file to begin a sole proprietorship or a partnership. However, businesses are required to file articles of incorporation, also known as a certificate of formation, to legally form a corporation in any state. Each state charges a fee, which varies from state to state, to file articles of incorporation. In addition, corporations are required to register with each state where the company intends to make business transactions. This requirement is not imposed on sole proprietorships or partnerships. Corporations have a structure consisting of shareholders, directors, officers, and employees. Every corporation must select at least one person to serve on its board of directors. The board of directors is responsible for allocating the company’s resources and increasing the shareholders’ profits. Officers are required to manage the day-to-day activities of the company and implement the decisions made by the company’s shareholders and directors. Sole proprietorships and partnerships have a more informal structure that does not require the selection of officers and directors. Sole proprietors have full control over every aspect of their business, whereas partnerships and corporations have to vote on important company issues. Corporations are more expensive and complicated to form than partnerships & proprietorships. Forming a corporation includes a lot of administrative fees, and complex tax and legal requirements. Corporations must file articles of incorporation, and obtain state and local licenses and permits. Corporations often hire lawyers for help with the process. The U.S. Small Business Administration advises only established, large companies with multiple employees start corporations. Partnerships are less costly and simpler to form. Partners must register the business with the state and obtain local or state business licenses and permits.

Background, Methodologies, Analysis & Findings

Sole proprietors and partners in a partnership business have unlimited liability for all debts and liabilities that occur while operating the business. This means partners and sole proprietors may lose their homes, cars, and other personal assets if the company’s assets are insufficient to cover the company’s debts. Corporations provide owners of the company with limited liability protection against business losses and obligations. This means owners of a corporation will not lose their homes if the company goes bankrupt. Owners of a corporation are liable for company debts and obligations up to the extent of their investment in the company. Partnerships and sole proprietorships are referred to as pass-through entities. This is because sole proprietors and partners in a partnership report their share of company profits and losses directly on their personal income tax returns. Sole proprietorships and partnerships are not required to file business taxes with the Internal Revenue Service. Corporations are subject to double taxation. This occurs when the corporation pays taxes on the company’s profits at the business level, and shareholders pay taxes on income received from the corporation on their personal tax return. Partnerships and sole proprietorships have far less paperwork and fewer ongoing formalities to adhere to in comparison to a corporation. Corporations are required to hold at least one annual meeting, while sole proprietorships and partnerships do not have to hold company meetings. A corporation must keep strict financial records and keep a ledger detailing how the company reached certain decisions. Unlike a corporation, sole proprietorships and partnerships are not required to file annual reports with the state or create financial statements. Partnerships have simpler management structures than corporations. In a partnership, all general partners decide how the company is run. General partners often assume management responsibilities or share in the decision of hiring and monitoring managers. Corporations are governed by shareholders, who conduct regular meetings to determine company management and policies. Shareholders often do not have as much day-to-day involvement in the management of the company but instead oversee

managers who run the company. The corporation must pay a fee along with filing the report, which varies from state to state. For example, the annual report fee is $150 in Florida, $45 in Arizona, and $9 in New York, as of publication. Sole proprietors do not have to file such reports with the state. Operating your business as a sole proprietorship means that the income of the business is your income — the business does not have to file separate federal or state income tax returns. However, operating your business as a C corporation will require separate federal and state income tax returns to be filed for the corporation and, in some cities or counties, a local tax return as well. This presents a double-taxation problem for small businesses operating as a C corporation — that is, the corporation must pay taxes on its profits and then you pay taxes on the corporation’s profits distributed to you as dividends.

Objectives

Objectives of Sole proprietorship & Partnership business

Sole trader business helps people to create work for them. Instead of looking for a job outside, a person can start his own small business. A person having surplus funds may start a sole proprietorship to make productive use of his funds. If the funds are small and not enough for a big business, it is better to set up a small business instead of keeping the funds idle. Sole proprietorship enables the owner to have full say and complete control over the business. Sole trader business provides an opportunity for an independent and honorable living. The sole trader is his own master and frees to take all the decisions. A sole trader comes in direct contact with his customers. Therefore, he can better understand and serve the consumers. Sole trader business can be set up nearest to consumers so that they can buy their daily necessities conveniently. Sole trader business helps in the distribution of income and wealth among a large number of people. It avoids monopoly and concentration of wealth in a few

hands. Sole proprietorship firms are usually small in size. These units provide ancillary service to big firms

Objectives of Corporations

Sales revenue: a traditional measure of the size and strength of a business – if revenue is growing then the business is growing

Profit: both the absolute level of profit and the profit margin – i.e. return on sales)

Return on investment (e.g. ROCE, ROI: particularly important for capital-intensive businesses)

Growth (sales volume, revenue, profit, earnings per share)

Market share (the proportion of markets and industries owned by the business or its

products)

Cash flow (this can be similar to a profit objective but with the focus on maximizing the net cash inflow of the business)

Shareholder value (particularly important for publicly-quoted businesses where senior management are tasked with growing the value of the business)

Corporate image & reputation (increasingly important – links closely with corporate social responsibility, product and customer service quality, and business ethics)

Limitations

Incorporating your business is done by following the corporation laws in the state where your business is located. In general, this requires filing the appropriate form and paying a filing

fee. For example, incorporating in Texas requires filing a certificate of the formation along with a $300 filing fee, as of publication. By contrast, you do not pay any formation fee or file a document to start your sole proprietorship. If you choose to use an assumed name for your business rather than your own name, some states or counties require that you file an assumed name certificate, which is significantly less expensive than incorporating. For example, in Travis County, Texas, the fee for filing an assumed name certificate is $14, as of publication. Record-keeping is an important part of every business, particularly with tracking income and expenses. However, state corporation laws generally require a business that is incorporated to comply with additional record-keeping laws that a sole proprietor does not. As an example, California’s General Corporation Law requires a corporation to adopt written bylaws and conduct an annual meeting that must be recorded in written minutes. Both the bylaws and minutes of annual meetings are kept with the corporation’s records. Although not required, an attorney should be consulted to ensure the records are in proper form. The time and expense for your work in preparing these documents, as well as any fees paid for professional services, are additional costs for operating a corporation over a sole proprietorship. State law also requires each corporation to file an information report on an annual or biennial basis. The purpose of the report is to update the corporation’s information on file with the state, such as its principal address and the names and addresses of its officers and directors.

Advantages of Corporation over a Partnership and Sole Proprietorship (Recommendation & Review)

As compared to another type of businesses, I personally recommend investing in corporations some advantages are below:

Liability Protection: The biggest benefit a corporation offers over other business structures is liability protection, according to Entrepreneur.com. Shareholders do not risk losing personal assets because of a company’s debts, because corporations are considered separate

legal entities from the people who own them. Owners of partnerships and sole proprietorships, on the other hand, are held responsible for all company debts and legal responsibilities and are subject to losing personal assets if the company goes bankrupt or is caught up in costly legal situations.

Access to Funds: Corporations can more easily raise funds than other forms of businesses. Corporations can sell stock to raise money for business expenses or cover debts. Sole proprietors and business partners, on the other hand, must try to come up with funds on their own or turn to loans or credit programs to raise money. It takes less time and effort to sell stocks than it does to apply for loans or seek out investors for a business.

Tax Benefits: Corporations enjoy some tax benefits that sole proprietorships and partnerships do not. Corporations must file taxes separately from the shareholders. Owners of corporations pay taxes on any salaries, bonuses, and dividends they earn from the corporation. However, loopholes exist to ease the burden of paying taxes as a corporation and as individual shareholders. A corporation is not required to pay tax on earnings paid as compensation to employees or shareholders, and it can deduct the payments as a business expense. Also, the corporate tax rate is usually lower than the personal income tax rate. The owners of sole proprietorships and partnerships pay income taxes at regular rates on the profits they earn from their companies.

Sources:

HUSELID, MARK A., SUSAN E. JACKSON, and RANDALL S. SCHULER. “TECHNICAL AND STRATEGIC HUMAN RESOURCE MANAGEMENT EFFECTIVENESS AS DETERMINANTS OF FIRM PERFORMANCE.” (2013): Print.

Stanciu, Valentin. “PERFORMANCE MANAGEMENT IMPLEMENTATION IN

HUMAN RESOURCE DOMAIN INTO ROMANIAN BANKING

SYSTEM.” (2013): Print

Hegewisch, Ariane, and Henrik H. Larsen. “Performance management, decentralization, and management development: local government in Europe.”

Journal of Management Development (2011): n. pag. Print.

Moore, Stanford, Craig Vollmers, Vijay Indu, and Annette M. Collins. “HUMAN RESOURCES MANAGEMENT SYSTEMS (HRMS).” (2012): Print.

Neubert, Gilles, and Philippe Adjadj. “Capacity Adjustment through Contingent Staffing Outsourcing.” (2010): Print.

Burn, Janice, and Shirley Bode. “Strategies for Consulting Engagement for E- business Development: A Case Analysis of Australian SME’s.” (2012): Print.

Seo, Byeongseon. “NONLINEAR MEAN REVERSION IN THE TERM STRUCTURE OF INTEREST RATES.” (2013): Print.

Lindhe, Tobias, Jan Södersten, and Ann Öberg. “Economic Effects of Taxing Different Organizational Forms under the Nordic Dual Income Tax.”International Tax and Public Finance (2013): n. pag. Print.

Briggeman, Brian C., Charles A. Towe, and Mitchell J. Morehart. “Credit Constraints: Their Existence, Determinants, and Implications for U.S. Farm and Nonfarm Sole Proprietorships.” (2012): Print.

. Mower, C. L. “Bodies in Labor: Sole Proprietorship and the Labor of Conduct in The Coquette.” American Literature (2013): n. pag. Print.

Traiger, Irving L. “Systematic approach to management.” (2012): Print

Mathis, Robert L, and John H. Jackson. Human Resource Management. Mason: Thomson/South-western, 2011. Print

Gaspar, Julian E. Introduction to Global Business: Understanding the International Environment and Global Business Functions. N.p., 2014. Print.

Make Your Small Business a Winner: Teach Yourself. Hodder Education, 2010. Print. Dessler, Gary. Human Resource Management. Upper Saddle River: Prentice-Hall, 2012. Print

Maddox Smith

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