One of the first steps in forming an organization is to determine the ownership structure, which has important implications for purposes of liability, tax, ability to raise capital, and the required paperwork (Kunz, 2016). The legal forms of organizations include corporations, S corporations, sole proprietorships, and partnerships.
Using the implications above, I will provide reasons for each one on why selecting a corporation or S corporation over a proprietorship or partnership would be the better option. For liability purposes, corporations provide more protection and shelter from lawsuits by keeping personal assets separate from business assets (Ehrhardt, 2015). For tax purposes, corporations file tax returns entirely separate from individuals and operates under an entirely different set of rules. Loopholes, various tax schemes, and lower tax rates allow corporations to make use of these benefits to continue to push forward with growth and innovation. Funding is possible for both corporations and partnerships through a number of methods – however, corporations are able to raise capital through an IPO or large venture capital raises and partnerships/proprietorships are not (Kunz, 2015).
On the other side, when dealing with less than 50 owners, a partnership or proprietorship makes more sense. The net income for the business is funneled to the individual’s tax returns but may not have the same protection from lawsuits so they must be careful with certain business ventures (Ehrhardt, 2015).
I have two businesses – one is a partnership with multiple people set up through an LLC. This shields us from liability, but the partnership allows us to form a complex business agreement and pass-through businesses financials into our tax returns. This business is a real estate investment company, so business structure makes sense. My other business is where I do contract work for software development, so sole proprietorship makes sense there as I do not need to take advantage of complex tax benefits, I do not have any employees, and financials are pretty straight-forward.
Resources
Ehrhardt, M. C., & Brigham, E. F. (2015). Corporate finance a focused approach (6 ed.). Boston, MA: Cengage Learning.
Kunz, M. (2016, October 26). The Advantages of a Corporation Over a Partnership and Sole Proprietership. Retrieved from https://smallbusiness.chron.com/advantages-corporation-over-partnership-sole-proprietership-19197.html
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