Francisco, Aldrianne T.

CEM115-1/C1
Research Assignment

Sole Proprietorship
A business that legally has no separate existence from its owner. Income and losses
are taxed on the individual's personal income tax return.
The sole proprietorship is the simplest business form under which one can operate a
business. The sole proprietorship is not a legal entity. It simply refers to a person
who owns the business and is personally responsible for its debts. A sole
proprietorship can operate under the name of its owner or it can do business under
a fictitious name, such as Nancy's Nail Salon. The fictitious name is simply a trade
name--it does not create a legal entity separate from the sole proprietor owner.
The sole proprietorship is a popular business form due to its simplicity, ease of
setup, and nominal cost. A sole proprietor need only register his or her name and
secure local licenses, and the sole proprietor is ready for business. A distinct
disadvantage, however, is that the owner of a sole proprietorship remains
personally liable for all the business's debts. So, if a sole proprietor business runs
into financial trouble, creditors can bring lawsuits against the business owner. If
such suits are successful, the owner will have to pay the business debts with his or
her own money.
The owner of a sole proprietorship typically signs contracts in his or her own name,
because the sole proprietorship has no separate identity under the law. The sole
proprietor owner will typically have customers write checks in the owner's name,
even if the business uses a fictitious name. Sole proprietor owners can, and often
do, commingle personal and business property and funds, something that
partnerships, LLCs and corporations cannot do. Sole proprietorships often have their

bank accounts in the name of the owner. Sole proprietors need not observe
formalities such as voting and meetings associated with the more complex business
forms. Sole proprietorships can bring lawsuits (and can be sued) using the name of
the sole proprietor owner. Many businesses begin as sole proprietorships and
graduate to more complex business forms as the business develops.
Because a sole proprietorship is indistinguishable from its owner, sole proprietorship
taxation is quite simple. The income earned by a sole proprietorship is income
earned by its owner. A sole proprietor reports the sole proprietorship income and/or
losses and expenses by filling out and filing a Schedule C, along with the standard
Form 1040. Your profits and losses are first recorded on a tax form called Schedule
C, which is filed along with your 1040. Then the "bottom-line amount" from
Schedule C is transferred to your personal tax return. This aspect is attractive
because business losses you suffer may offset income earned from other sources.
As a sole proprietor, you must also file a Schedule SE with Form 1040. You use
Schedule SE to calculate how much self-employment tax you owe. You need not pay
unemployment tax on yourself, although you must pay unemployment tax on any
employees of the business. Of course, you won't enjoy unemployment benefits
should the business suffer.
Sole proprietors are personally liable for all debts of a sole proprietorship business.
Let's examine this more closely because the potential liability can be alarming.
Assume that a sole proprietor borrows money to operate but the business loses its
major customer, goes out of business, and is unable to repay the loan. The sole
proprietor is liable for the amount of the loan, which can potentially consume all her
personal assets.
Imagine an even worse scenario: The sole proprietor (or even one her employees) is
involved in a business-related accident in which someone is injured or killed. The

resulting negligence case can be brought against the sole proprietor owner and
against her personal assets, such as her bank account, her retirement accounts,
and even her home.
Consider the preceding paragraphs carefully before selecting a sole proprietorship
as your business form. Accidents do happen, and businesses go out of business all
the time. Any sole proprietorship that suffers such an unfortunate circumstance is
likely to quickly become a nightmare for its owner.
If a sole proprietor is wronged by another party, he can bring a lawsuit in his own
name. Conversely, if a corporation or LLC is wronged by another party, the entity
must bring its claim under the name of the company.
The advantages of a sole proprietorship include:

Owners can establish a sole proprietorship instantly, easily and inexpensively.

Sole proprietorships carry little, if any, ongoing formalities.

A sole proprietor need not pay unemployment tax on himself or herself

(although he or she must pay unemployment tax on employees).

Owners may freely mix business or personal assets.

The disadvantages of a sole proprietorship include:

Owners are subject to unlimited personal liability for the debts, losses and
liabilities of the business.

Owners cannot raise capital by selling an interest in the business.

Sole proprietorships rarely survive the death or incapacity of their owners and
so do not retain value.

One of the great features of a sole proprietorship is the simplicity of formation. Little
more than buying and selling goods or services is needed. In fact, no formal filing or
event is required to form a sole proprietorship; it is a status that arises
automatically from one's business activity.

Corporation
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.
Corporations come in many different types but are usually divided by the law of the
jurisdiction where they are chartered into two kinds: by whether or not they can
issue stock, or by whether or not they are for profit.
Where local law distinguishes corporations by ability to issue stock, corporations
allowed to do so are referred to as "stock corporations", ownership of the
corporation is through stock, and owners of stock are referred to as "stockholders."
Corporations not allowed to issue stock are referred to as "non-stock" corporations,
those who are considered the owners of the corporation are those who have
obtained membership in the corporation, and are referred to as a "member" of the
corporation.
Corporations chartered in regions where they are distinguished by whether they are
allowed to be for profit or not are referred to as "for profit" and "not-for-profit"
corporations, respectively.

There is some overlap between stock/non-stock and for profit/not-for-profit in that

not-for-profit corporations are always non-stock as well. A for profit corporation is
almost always a stock corporation, but some for profit corporations may choose to
be non-stock. To simplify the explanation, whenever "stockholder" is used in the rest
of this article to refer to a stock corporation, it is presumed to mean the same as
"member" for a non-profit corporation or for profit, non-stock corporation.
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.
In American English the word corporation is most often used to describe
large business corporations. In British English and in the Commonwealth countries,
the term company is more widely used to describe the same sort of entity while the
word corporationencompasses all incorporated entities. In American English, the
word company can include entities such as partnerships that would not be referred
to as companies in British English as they are not a separate legal entity.
Despite not being human beings, corporations, as far as the law is concerned,
are legal persons, and have many of the same rights and responsibilities as natural
persons do. Corporations can exercise human rights against real individuals and the
state, and they can themselves be responsible for human rights
violations. Corporations can be "dissolved" either by statutory operation, order of
court, or voluntary action on the part of shareholders. Insolvency may result in a
form of corporate failure, when creditors force the liquidation and dissolution of the
corporation under court order, but it most often results in a restructuring of
corporate holdings. Corporations can even be convicted of criminal offenses, such
as fraud and manslaughter. However corporations are not considered living entities
in the way that humans are.

Partnership
A partnership is a single business where two or more people share ownership.
Each partner contributes to all aspects of the business, including money, property,
labor or skill. In return, each partner shares in the profits and losses of the business.
Because partnerships entail more than one person in the decision-making process,
its important to discuss a wide variety of issues up front and develop a legal
partnership agreement. This agreement should document how future business
decisions will be made, including how the partners will divide profits, resolve
disputes, change ownership (bring in new partners or buy out current partners) and
how to dissolve the partnership. Although partnership agreements are not legally

required, they are strongly recommended and it is considered extremely risky to

operate without one.

Types of Partnerships
There are three general types of partnership arrangements:

General Partnerships assume that profits, liability and management duties

are divided equally among partners. If you opt for an unequal distribution, the
percentages assigned to each partner must be documented in the
partnership agreement.

Limited Partnerships (also known as a partnership with limited liability) are

more complex than general partnerships. Limited partnerships allow partners
to have limited liability as well as limited input with management decisions.
These limits depend on the extent of each partners investment percentage.
Limited partnerships are attractive to investors of short-term projects.

Joint Ventures act as general partnership, but for only a limited period of
time or for a single project. Partners in a joint venture can be recognized as
an ongoing partnership if they continue the venture, but they must file as
such.

Forming a Partnership
To form a partnership, you must register your business with your state, a process
generally done through your Secretary of States office.
Youll also need to establish your business name. For partnerships, your legal name
is the name given in your partnership agreement or the last names of the partners.
If you choose to operate under a name different than the officially registered name,
you will most likely have to file a fictitious name (also known as an assumed name,
trade name, or DBA name, short for "doing business as").
Once your business is registered, you must obtain business licenses and permits.
Regulations vary by industry, state and locality. Use our Licensing & Permits tool to
find a listing of federal, state and local permits, licenses and registrations you'll
need to run a business.
If you are hiring employees, read more about federal and state regulations for
employers.
Partnership Taxes
Most businesses will need to register with the IRS, register with state and local
revenue agencies, and obtain a tax ID number or permit.
A partnership must file an annual information return to report the income,
deductions, gains and losses from the businesss operations, but the business itself
does not pay income tax. Instead, the business "passes through" any profits or
losses to its partners. Partners include their respective share of the partnership's
income or loss on their personal tax returns.

Partnership taxes generally include:

Annual Return of Income

Employment Taxes

Excise Taxes

Partners in the partnership are responsible for several additional taxes, including:

Income Tax

Self-Employment Tax

Estimated Tax

Filing information for partnerships:

Partnerships must furnish copies of their Schedule K-1 (Form 1065)

to

all partners by the date Form 1065 is required to be filed, including

extensions.

Partners are not employees and should not be issued a Form W-2.

The IRS guide to Partnerships provides all relevant tax forms and additional
information regarding their purpose and use.
Advantages of a Partnership

Easy and Inexpensive. Partnerships are generally an inexpensive and

easily formed business structure. The majority of time spent starting a
partnership often focuses on developing the partnership agreement.

Shared Financial Commitment. In a partnership, each partner is equally

invested in the success of the business. Partnerships have the advantage of
pooling resources to obtain capital. This could be beneficial in terms of
securing credit, or by simply doubling your seed money.

Complementary Skills. A good partnership should reap the benefits of

being able to utilize the strengths, resources and expertise of each partner.

Partnership Incentives for Employees. Partnerships have an employment

advantage over other entities if they offer employees the opportunity to
become a partner. Partnership incentives often attract highly motivated and
qualified employees.

Disadvantages of a Partnership

Joint and Individual Liability. Similar to sole proprietorships, partnerships

retain full, shared liability among the owners. Partners are not only liable for
their own actions, but also for the business debts and decisions made by
other partners. In addition, the personal assets of all partners can be used to
satisfy the partnerships debt.

Disagreements Among Partners. With multiple partners, there are bound

to be disagreements Partners should consult each other on all decisions,
make compromises, and resolve disputes as amicably as possible.

Shared Profits. Because partnerships are jointly owned, each partner must
share the successes and profits of their business with the other partners. An
unequal contribution of time, effort, or resources can cause discord among
partners.