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The advantages and disadvantages between a proprietorship, partnership, and a corporation. 

Jul 24th, 2015

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Advantages of Sole Proprietorship

Many sole proprietorships are one-owner businesses. An individual owns and operates the business and is responsible for all business transactions. He may or may not have any employees. He can close it, sell it or pass it down to his heirs at any time. A sole proprietor pays taxes as a part of his individual income tax filing. Some businesses may require licensing. However, the costs of obtaining a license for sole proprietors are substantially less than those for corporations. Start-up costs for sole proprietorship are very low.

Disadvantages of Sole Proprietorship

The main disadvantage of sole proprietorships is the owner's personal liability for all debts incurred by the business. Creditors may come after an owner's personal assets if a small business is unable to cover debts. Sole proprietors may have difficulty obtaining business loans. Financial institutions are reluctant to lend to them as many small business loans go into default when companies struggle to stay afloat. While a sole proprietorship does not pay taxes, the owner may have to pay higher taxes as his profits increase. A sole proprietor may not deduct health insurance expenses when filing a tax return.

Advantages of Partnership

  • Capital – Due to the nature of the business, the partners will fund the business with start up capital. This means that the more partners there are, the more money they can put into the business, which will allow better flexibility and more potential for growth. It also means more potential profit, which will be equally shared between the partners.
  • Flexibility – A partnership is generally easier to form, manage and run. They are less strictly regulated than companies, in terms of the laws governing the formation and because the partners have the only say in the way the business is run (without interference by shareholders) they are far more flexible in terms of management, as long as all the partners can agree.

Disadvantages of Partnership

  • Disagreements – One of the most obvious disadvantages of partnership is the danger of disagreements between the partners. Obviously people are likely to have different ideas on how the business should be run, who should be doing what and what the best interests of the business are. This can lead to disagreements and disputes which might not only harm the business, but also the relationship of those involved. This is why it is always advisable to draft a deed of partnership during the formation period to ensure that everyone is aware of what procedures will be in place in case of disagreement and what will happen if the partnership is dissolved.
  • Agreement – Because the partnership is jointly run, it is necessary that all the partners agree with things that are being done. This means that in some circumstances there are less freedoms with regards to the management of the business. Especially compared to sole traders. However, there is still more flexibility than with limited companies where the directors must bow to the will of the members (shareholders).

Advantages of corporation

A company does not have to be large to become a corporation. A corporation is a separate business entity that gives its shareholders several tax and legal advantages. The shareholders' personal assets are protected from the business debts of the company. A corporation can deduct the full cost of health insurance and up to $50,000 per life insurance policy on its taxes. Depending on the corporation type, shareholders may be able to avoid double taxation by choosing to pay taxes at his tax rate. A corporation can raise capital by selling stock.

Disadvantages of corporation

Start-up costs for corporations are higher than for sole proprietorships. Shareholders must file articles of incorporation, bylaws, corporate minutes and certificates of good standing. The state where they incorporate may require additional documents. Depending on the type of business, a corporation may need to obtain licenses and permits. Corporations are subject to double taxation. A small business pays annual taxes annual on its profits. Shareholders pay taxes on the income they receive from the profits.

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Jul 24th, 2015

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