A link between two or more people in business who are looking for a profit. Partnerships can be created with little formality, but since more than one person is involved, a partnership agreement should be created. A partnership agreement establishes the terms of the company by formalizing rules on profit and loss sharing, ownership percentages, dissolution terms, and management rights, among others. Sole proprietorship: The most common and simplest form of business is the sole proprietorship. In a sole proprietorship, only one person carries out a commercial activity without the need for a formal organization. If the business is conducted under an assumed name (a name other than the person`s last name), an accepted name certificate (commonly referred to as a DBA) must be submitted to the district officer`s office in the county where an office is maintained. If no business premises are maintained, a certificate of the adopted name must be presented in all counties where business is carried out under the adopted name. A company may have a single shareholder or several. In listed companies, there are often thousands of shareholders. Companies are established and regulated in accordance with company law in their jurisdiction of residence. The decision on the structure of the company is a decision that a person must make in consultation with a lawyer and an accountant and taking into account issues related to taxes, liability, management, continuity, transferability of ownership shares and the formality of the transaction. Disadvantages of a sole proprietorship: • The owner has unlimited personal risk because the owner is responsible for all the responsibilities of the business. • Investors would generally not invest in a company organized as a sole proprietorship.
Want to know the other steps to start a business? Check out our blog post “11 Steps to Starting a Business in Tennessee or Alabama.” A company is a legal person that is distinct and independent of the persons who own or manage the company, namely the shareholders. A company has the ability to enter into contracts separate from those of the shareholders, but it also has certain responsibilities such as paying taxes. Businesses are generally more suitable for large, established businesses with multiple employees or where other factors apply (for example, if a business sells a product or provides a service that could expose the business to significant liability). Ownership is determined by the issuance of shares. Taxation: A partnership is a reporting entity and not a taxing entity. A partnership must file an annual information return (Form 1065) with the IRS to report operating income and losses, but does not pay federal income tax. Profits and losses are passed on to the owners on the basis of the percentages of profit sharing set out in the partnership agreement. Each partner pays taxes on his share of the result. Liability: The owner of the sole proprietorship is personally liable without limitation for all liabilities incurred by the company. You can mitigate this risk with strong insurance and contracts.
Disadvantages of partnerships: • The partners are personally liable for the debts and liabilities of the company. • May lead to management and oversight issues in the absence of a partnership agreement. A company is a legal entity with the characteristics of limited liability, centralization of administration, indefinite duration and ease of transferability of ownership shares. The owners of a corporation are called “shareholders.” The people who manage the affairs and affairs of a company are called “directors”. However, Crown corporation law requires shareholders to enter into shareholder agreements to eliminate directors and ensure shareholder management. Choosing the best management structure for your business is a decision you make with the advice of a lawyer. The Secretary of State cannot help you. When the company has achieved its objectives, its legal life can be terminated by a process called liquidation or liquidation. Essentially, a company appoints a liquidator who sells the company`s assets, and then the company pays all creditors and passes all remaining assets on to shareholders. Open partnership: A partnership is created when two or more people join forces to manage a business with the intention of making a profit. A partnership generally operates under a partnership agreement, but there is no requirement for the agreement to be in writing and no requirement for submission from the state. If the partnership`s activities are conducted under an adopted name (a name that does not include the last name of all partners), an accepted name certificate (commonly referred to as a DBA) must be submitted to the district officer`s office in the county where an office is maintained.
If no business premises are maintained, a certificate of the adopted name must be presented in all counties where business is carried out under the adopted name. Liability: A corporation is an “immortal” legal entity, which means that it does not end with the death of the shareholder. The shareholders of the company have limited liability because they are not personally responsible for the debts and obligations of the company. Shareholders cannot lose more money than the amount they have invested in the business. Like the provisions of an LLC, shareholders must be careful not to “penetrate the corporate veil.” Personal checking accounts should not be used for commercial purposes and the company name should always be used when interacting with customers. Advantages of the LLC structure: • The owners have limited liability, which means that the company is responsible for all liabilities incurred by the company. • The profits and losses of the company are passed on to the member and taxed only at the individual level. • Allows unlimited taxation of members (C-Corp): For federal income tax purposes, a C-Corp is recognized as a separate entity that pays tax, so that the entity files its own tax return (Form 1120). A company C is subject to corporation tax on all corporate profits (the company pays taxes).
Shareholders pay income tax on the company`s profits, which are distributed by the company to the owners. As a result, C-Bodies are subject to “double taxation”. Advantages of partnerships: • Fairly easy to create and maintain. • Profits and losses are passed on to the owner`s personal tax returns. To be recognized as a corporation, a corporation must submit an application containing the articles of the corporation (charter) to the state, pay a incorporation fee, and be approved by the state. Once approved, the company must develop its by-laws. Organizational costs, including attorneys` fees, underwriting fees for equity and bond issues, and incorporation costs, are recognised as intangible assets and amortized over a maximum period of 40 years. Incorporation: Companies are more complex businesses to create, have more legal and accounting requirements, and are more complex to operate than sole proprietorships, partnerships, or LLCs. One of the main disadvantages of a company is the high level of governance and oversight by the board of directors. Often, this prolongs decision-making when multiple shareholders or investors are involved. Hybrid between a company, a general partnership and a sole proprietorship. The owners of an LLC are called members.
Members can be individuals, corporations, other LLCs, and foreign corporations. Most states allow a sole proprietorship LLC called a “single-member LLC.” The process of forming a company varies depending on the state in which you do business and the state in which you live. In most cases, you will need to file a settlement with the state and then issue shares to the company`s shareholders. Shareholders elect the board of directors at an annual meeting. Advantages of a sole proprietorship: • Easy and quite cheap to establish. • The owner has absolute control over the business. Liability: LLC members are protected from personal liability for the company`s debts and claims, a feature known as “limited liability.” When a limited liability company owes money or faces a lawsuit, only the assets of the company itself are at risk. Creditors may not access the personal property of LLC members except in cases of fraud or illegality.
LLC members should exercise caution so as not to “penetrate the corporate veil,” which would expose members to personal liability. For example, LLC owners should not use a personal checking account for business purposes and should always use the LLC company name (not the owner`s individual names) when working with customers. The company is considered an independent legal entity that carries out its activities in its own name.