When organizing a new
business, one of the most important decisions to be made is choosing the
structure of a business.
Forms of Business
Ownership
This decision will
have long-term implications, so consult with an accountant and attorney to help
you select the form of ownership that is right for you. Your choice will be
based on:
1. Your vision
regarding the size and nature of your business.
2. The level of
control you wish to have.
3. The level of
"structure" you are willing to deal with.
4. The business's
vulnerability to lawsuits.
5. Tax implications
of the different ownership structures.
6. Expected profit
(or loss) of the business.
7. Whether or not you
need to re-invest earnings into the business.
8. Your need for
access to cash out of the business for yourself.
9. The risks of your
personal assets from business liabilities.
10. Are their
partners and/or investors that will be part of the business.
Sole Proprietorships
The vast majority of
small business starts out as sole proprietorships … very dangerous. These firms
are owned by one person, usually the individual who has day-to-day
responsibility for running the business. Sole proprietors own all the assets of
the business and the profits generated by it. They also assume “complete
personal” responsibility for all of its liabilities or debts. In the eyes of
the law, you are one in the same with the business.
Advantages of a Sole Proprietorship
1. Easiest and least
expensive form of ownership to organize.
2. Sole proprietors
are in complete control, within the law, to make all decisions.
3. Sole proprietors
receive all income generated by the business to keep or reinvest.
4. Profits from the
business flow-through directly to the owner's personal tax return.
5. The business is
easy to dissolve, if desired.
Disadvantages of a Sole Proprietorship
1. Unlimited
liability and are legally responsible for all debts against the business.
2. Their business and
personal assets are 100% at risk.
3. Have almost be
ability to raise investment funds.
4. Are limited to
using funds from personal savings or consumer loans.
5. Have a hard time
attracting high-caliber employees, or those that are motivated by
the opportunity to
own a part of the business.
6. Employee benefits
such as owner's medical insurance premiums are not directly
deductible from
business income (partially deductible as an adjustment to income).
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