Types of business organizations essay

You can find out more about Kelly here. For more information about tax and blogging, check out her handy list of prior articles on the subject including Problogger articles! Follows is a brief rundown of the most popular forms of business entities for freelancers and bloggers:.

Sole Proprietorship The sole proprietorship is the most simple form of business entity. There is no formal procedure to form a sole proprietorship and there are few formal accounting requirements. There are no separate tax forms; you file taxes on your own personal income tax return.

You can easily exchange personal and business assets. This is how most bloggers and freelancers operate. Personal assets are essentially treated, for liability purposes, as assets of the business. Additionally, since your business income is reported on your personal return, deductions expenses like medical insurance are limited to the caps and restrictions for individuals. In most cases, these deductions are less favorable to take as personal expenses than as business expenses.

No income tax is paid at the partnership level though a partnership may be subject to other state and local taxes. As a result, personal and business assets are not separate and personal assets can be subject to the liabilities and obligations of the partnership. Additionally, just like with a sole proprietorship, the availability of certain types of deductions are limited to the tax floors and ceilings on your personal income tax return.

Choose Your Business Structure

There is one significant difference: in most states, an LLP may register with the Department of State. In other words, so long as you observe the proper rules, liability is largely limited to your own actions. The LLP, like a regular partnership, is treated as pass through entity for federal and state tax purposes. Again, income and losses pass through to the partners either in proportion to ownership or according to your partnership agreement.

An LLP does not offer complete liability protection.

Essay on Types of Business Entities -- sole proprietorship, coporation,

An LLC can be structured to provide for added flexibility, including unlimited members. An LLC also provides ease of operation and possibilities for expansion which makes it attractive for a number of freelancers.

The 4 Major Business Organization Forms

Banks, mortgage companies and other institutions will want to see your agreement when making loans or setting up accounts. Even though the LLC offers pass through tax treatment, liability is limited in much the same way as with a C corporation. This means that so long as you follow the corporate formalities, as well as keep your personal assets separate from your business assets, your liability will largely be limited to your business assets.

S corporation The S corporation is another special form of corporation that operates like a C corporation but is taxed like a partnership. There are strict limitations on the structure of an S corporation including the number and types of shareholders. The S corporation is considered a good vehicle for small, closely-held corporations. Traditionally, compensation to shareholders who also served as owners was taxable as ordinary income.

1.4 Types of Business Organisations IGCSE Business Studies

The rate for self-employment tax is This tax is on top of the actual income tax on those wages. The result is a painful hit — the same as operating as a sole proprietor.

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So practitioners started thinking: what if you paid yourself a dividend instead of a salary? But under the new tax laws, it may result in tax savings. The S corporation also has a number of restrictions relating to ownership — be sure and check out these ahead of time. If you lose S status due to a reporting or management violation, the time period is generally ten years before you can regain your status.

The default is that you would be treated as a C corporation, which likely not a good thing from a tax perspective. The advantages of a C corporation are continuous life, clear divisibility of assets between personal and corporate, limited liability among shareholders, freely transferable shares of stock, virtually unlimited options on structuring stock ownership, and favorable tax treatment for certain expenses. All good, right?

This means that the C corporation pays a tax on its income for the corporate year and the shareholders pay tax on dividends received from the corporation. The Bottom Line Be informed. Know enough to know the direction that you generally want to go. While it feels cheap and easy to simply incorporate online, you may be creating a bigger monster — some states charge annual fees for incorporated entities which can add significantly to your tax bill. Additionally, creating an incorporated entity may subject you to local taxes that you would not have been required to pay if you remained unincorporated.

We often joke that our office is like that Midas commercial: you can pay us now or you can pay us later.

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For more information about tax and blogging, check out my handy list of prior articles on the subject including Problogger articles! Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

If you have a question, ask the taxgirl. Thanks for this article! The timing could not be better for me. So in a nutshell, do you see any potential problems with starting as a Sole Proprietorship, and eventually moving to an LLC, or S Corporation? Thanks again Kelly, for the great posts, and thank you Darren for this wonderful resource!

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Keep in mind that the appeal of some of these entities — like an LLC — is the flexibility. As to your umbrella approach, that is classic business planning — good thinking!

Selecting a Business Entity

Any suggestions on whether to set it up as a U. I should incorporate mainly because I do a lot of freelance development work and it would be good tax wise writing stuff off. It also looks much more professional in my opinion. The problem is, at least in Canada, is that it takes much longer to go through this process than it does to just be yourself. Good summary. I think it would be important to review the different implications for US versus non-US owners.

Forms of Business Organizations - Essay Example

While an LLC is a very convenient and low-cost way for Americans, a C corporation would give the best benefits if you want to establish a US presence. Also, would be nice to talk about the differences between states in terms of taxation. I chose an LLC over an S corporation because in delaware there are fewer reporting requirements which makes my life easier.

It combines the liability protection of a corporation with the tax treatment and ease of administration of a partnership. As the name suggests, it offers liability protection to its owners for company debts and liabilities. Simplicity and Flexibility While LLCs are essentially new creations of state legislatures, corporations are truly ancient--and today's corporate law still carries some unwanted baggage. The modern American corporation has antecedents that date to Roman times, inherited by us through English law. The basic principles of American corporate law have not changed significantly in centuries.

go Probably the single greatest disadvantage of the corporate form is the burdensome range of formalities that corporate managers must observe. A modern corporation's heavy administrative burden is a remnant of the more traditional and formal legal system under which corporate law was cultivated. The LLC changed all that. The LLC offers the liability protection benefits of the corporation without the corporation's burdensome formalities. It is this simplicity that has made the LLC an instantly popular business form with businesspersons operating smaller companies.

Another attractive feature of LLCs that we will discuss throughout this book is their flexibility. LLC management can elect to be taxed either as partnerships or as corporations. LLCs can create a board of directors, and can have a president and officers just like a corporation.