Assignment on

Forms of Business Organization

Submitted to:

Prof. Dr. Shima Zaman

Course Instructor
Business Law & Ethics

Submitted By:

Nagib Anjum
I.D: 2016-3-95-049

Sec: 1

Date of Submission
12-Feb-20
Forms of Business Organization:
A business can be organized in one of several ways, and the form its owners choose will affect the
companies and owners' legal liability and income tax treatment. Here are the most common options and
their major defining characteristics.

Sole Proprietorship
The default option is to be a sole proprietor. With this option there are fewer forms to file than with other
business organizations. The business is structured in such a manner that legal documents are not required
to determine how profit-sharing from business operations will be allocated.

This structure is acceptable if you are the business's sole owner and you do not need to distinguish the
business from yourself. Being a sole proprietor does not preclude you from using a business name that is
different from your own name, however. In a sole proprietorship all profits, losses, assets and liabilities
are the direct and sole responsibility of the owner. Also, the sole proprietor will pay self-employment tax
on his or her income.

Sole proprietorships are not ideal for high-risk businesses because they put your personal assets at risk. If
you are taking on significant amounts of debt to start your business, if you've gotten into trouble with
personal debt in the past or if your business involves an activity for which you might potentially be sued,
then you should choose a legal structure that will better protect your personal assets. Nolo, a company
whose educational books make legal information accessible to the average person, gives several examples
of risky businesses, including businesses that involve child care, animal care, manufacturing or selling
edible goods, repairing items of value, and providing alcohol. These are just a few examples. There are
many other activities that can make your business high risk.

If the risks in your line of work are not very high, a good business insurance policy can provide protection
and peace of mind while allowing you to remain a sole proprietor. One of the biggest advantages of a sole
proprietorship is the ease with which business decisions can be made.

In a words-

 A sole proprietorship is a business owned by only one person. It is easy to set-up and is the least
costly among all forms of ownership.
 The owner faces unlimited liability; meaning, the creditors of the business may go after the
personal assets of the owner if the business cannot pay them.
 The sole proprietorship form is usually adopted by small business entities.
  Owner remains personally liable for lawsuits filed against the business.
 No state filing required to form a sole proprietorship.
 Owner reports business profit and loss on their personal tax return.

Advantages of a Sole Proprietorship

 Easiest and least expensive form of ownership to organize.

 Sole proprietors are in complete control, and within the parameters of the law, may make
decisions as they see fit.
 Profits from the business flow-through directly to the owner’s personal tax return.
 The business is easy to dissolve, if desired.

Disadvantages of a Sole Proprietorship

 Sole proprietors have unlimited liability and are legally responsible for all debts against the
business. Their business and personal assets are at risk.
 May be at a disadvantage in raising funds and are often limited to using funds from personal
savings or consumer loans.
 May have a hard time attracting high-caliber employees, or those that are motivated by the
opportunity to own a part of the business.
 Some employee benefits such as owner’s medical insurance premiums are not directly deductible
from business income (only partially as an adjustment to income).

Partnership:
A partnership is a structure appropriate to use if you are not going to be the sole owner of your new
business.

General Partnership

A General Partnership is composed of 2 or more persons (usually not a married couple) who agree to
contribute money, labor, or skill to a business. Each partner shares the profits, losses, and management of
the business and each partner is personally and equally liable for debts of the partnership. Formal terms of
the partnership are usually contained in a written partnership agreement. In a general partnership, all
partners are personally liable for business debts, any partner can be held totally responsible for the
business and any partner can make decisions that affect the whole business.

Limited Partnership

A Limited Partnership is composed of one or more general partners and one or more limited partners. The
general partners manage the business and share fully in its profits and losses. Limited partners share in the
profits of the business, but their losses are limited to the extent of their investment. Limited partners are
usually not involved in the day-to-day operations of the business. Filing with the Washington Secretary of
State is required. In a limited partnership, one partner is responsible for decision-making and can be held
personally liable for business debts. The other partner merely invests in the business. Although the
general structure of limited partnerships can vary, each individual is liable only to the extent of their
invested capital.

Limited Liability Partnership (LLP)

A Limited Liability Partnership (LLP) is similar to a General Partnership except that normally a partner
doesn’t have personal liability for the negligence of another partner. This business structure is used most
by professionals, such as accountants and lawyers. Filing with the Washington Secretary of State is
required.

Limited Liability Limited Partnership (LLLP)

A Limited Liability Limited Partnership is a Limited Partnership that chooses to become an LLLP by
including a statement to that effect in its certificate of limited partnership. This type of business structure
may shield general partners from liability for obligations of the LLLP. Filing with the Washington
Secretary of State is required.

In a words-

 A partnership is a business owned by two or more persons who contribute resources into the
entity. The partners divide the profits of the business among themselves.
 In general partnerships, all partners have unlimited liability. In limited partnerships, creditors
cannot go after the personal assets of the limited partners.
 Partners remain personally liable for lawsuits filed against the business.
 Usually no state filing required to form a partnership.
 Easy to form and operate.
 Owners report their share of profit and loss in the company on their personal tax returns.

Advantages of a Partnership

 Partnerships are relatively easy to establish; however time should be invested in developing the
partnership agreement.
 With more than one owner, the ability to raise funds may be increased.
 The profits from the business flow directly through to the partners’ personal tax return.
 Prospective employees may be attracted to the business if given the incentive to become a
partner.
 The business usually will benefit from partners who have complementary skills.

Disadvantages of a Partnership

 Partners are jointly and individually liable for the actions of the other partners.
 Profits must be shared with others.
 Since decisions are shared, disagreements can occur.
  Some employee benefits are not deductible from business income on tax returns.
 The partnership may have a limited life; it may end upon the withdrawal or death of a partner.

Corporation
Another type of business structure is a corporation. Incorporation can be done at the federal or
provincial/territorial level. When you incorporate your business, it is considered to be a legal entity that is
separate from its shareholders. As a shareholder of a corporation, you will not be personally liable for the
debts, obligations or acts of the corporation. It is always wise to seek legal advice before incorporating.
The corporate structure distinguishes the business entity from its owner and can reduce liability.
However, it is considered more complicated to run a corporation because of tax, accounting, record
keeping and paperwork requirements. Unless you want to have shareholders or your potential clients will
only do business with a corporation, it may not be logical to establish your business as a corporation from
the start - an LLC may be a better choice.

The steps for establishing a corporation are very similar to the steps for establishing an LLC. You will
need to choose a business name, appoint directors, file articles of incorporation, pay filing fees and follow
any other specific state/national requirements. (Find out how becoming a corporation can protect and
further your finances. See Should You Incorporate Your Business?)

There are two types of corporations: C corporations (C corps) and S corporations (S corps). C
corporations are considered separate tax-paying entities. C corps files their own income tax returns, and
income earned remains in the corporation until it is paid as a salary or wages to the corporation's officers
and employees. Corporate income is often taxed at lower rates than personal income, so you can save
money on taxes by leaving money in the corporation.

If you're only making enough to get by, however, this won't help you because you'll need to pay almost
all of the corporation's earnings to yourself. If the corporation has shareholders, corporate earnings
become subject to double taxation in the sense that income earned by the corporation is taxed and
dividends distributed to shareholders are also taxed. However, if you are a one-person corporation, you
don't have to worry about double taxation.

S corporations are pass-through entities, meaning that their income, losses, deductions and credits pass
through the company and become the direct responsibility of the company's shareholders. The
shareholders report these items on their personal income tax returns, thus S corps avoid the income
double taxation that is associated with C corps.
All shareholders must sign IRS form 2553 to make the business an S corporation for tax purposes. The
IRS also requires S corps to meet the following requirements:

Be a domestic corporation

Have only allowable shareholders, including individuals, certain trusts and estates

Not include partnerships, corporations or non-resident alien shareholders

Have no more than 100 shareholders

Have one class of stock

Not be an ineligible corporation (i.e., certain financial institutions, insurance companies and domestic
international sales corporations)

In a words-

 A corporation is a business organization that has a separate legal personality from its owners.
Ownership in a stock corporation is represented by shares of stock.
 The owners (stockholders) enjoy limited liability but have limited involvement in the company's
operations. The board of directors, an elected group from the stockholders, controls the activities
of the corporation.

Advantages of a Corporation

 Shareholders have limited liability for the corporation’s debts or judgments against the
corporation.
 Generally, shareholders can only be held accountable for their investment in stock of the
company. (Note however, that officers can be held personally liable for their actions, such as the
failure to withhold and pay employment taxes.
 Corporations can raise additional funds through the sale of stock.
 A Corporation may deduct the cost of benefits it provides to officers and employees.
 Can elect S Corporation status if certain requirements are met. This election enables company to
be taxed similar to a partnership
 Ownership is transferable
 Continuous existence
 Separate legal entity
 Easier to raise capital than it might be with other business structures
 Possible tax advantage as taxes may be lower for an incorporated business

Disadvantages of a Corporation

 The process of incorporation requires more time and money than other forms of organization.
  Corporations are monitored by federal, state and some local agencies, and as a result may have
more paperwork to comply with regulations.
 Incorporating may result in higher overall taxes. Dividends paid to shareholders are not
deductible from business income; thus this income can be taxed twice.
 A corporation is closely regulated
 More expensive to set up a corporation than other business forms
 Extensive corporate records required, including documentation filed annually with the
government
 Possible conflict between shareholders and directors
 You may be required to prove residency or citizenship of directors

Regardless of the way a business is structured, its owners will have the same overarching goals when it
comes to the company's financial management.