Small Business Assistance Center Network

Various Types Of Business Entities

SOLE PROPRIETORSHIP

A sole proprietorship is a business which is owned directly by a single individual. That individual is solely responsible for all aspects of the business and is personally liable for all debts, even those in excess of the amount invested in the business.

Advantages

Low organization costs, greatest freedom from regulation, possible tax advantages (taxation of owner at his/her individual rate, owner may deduct losses from his/her own individual return), minimal working capital.

Disadvantages

Unlimited liability, difficulty in raising capital (must use own money or borrow), and lack of continuity. The use of an assumed or fictitious name must be filed with the Fictitious Name Section of your state's Corporation Bureau.

PARTNERSHIP

A partnership is a business jointly owned by two or more individuals and/or entities. Each of the individuals/entities is personally liable for the debts of the partnership. In some respects, the law treats a partnership as a legal entity, but in others, it does not. The rights and privileges of the partners and the partnership are defined by law and the partnership agreement.

Advantages

Low organization costs, additional capital and management resources (more than one person contributing), possible tax advantages (taxation of partners at their individual rate, losses may be deducted from each partner's individual return), limited outside regulation.

Disadvantages

Unlimited liability, difficulty in raising capital (must use partner's money or borrow), divided authority, difficulty in finding suitable partners. The use of an assumed or fictitious name must be filed with the Fictitious Name Section of the Corporation Bureau in Harrisburg.

CORPORATION

A corporation is a separate legal entity which acts as a single person and is created under statutory law. The corporation owns the business and, in turn, the corporation issues shares of stock to individuals investing in the corporation.

Advantages

Limited liability (investors may be liable only for the amount invested), ease of transferring ownership (selling shares), ease of raising capital (selling shares), possible tax advantage (corporate tax rate, shareholders taxed only on dividends received), specialized management and continuous existence.

Disadvantages

Close regulations (created and governed by state law), greater organizational and record keeping costs (must keep separate records from any individual), most expensive form to organize, possible double taxation (corporate tax, tax on dividends to shareholders).

LIMITED LIABILITY COMPANY

When all requirements are fulfilled, a Limited Liability Company (LLC) is taxed as a partnership, instead of a corporation, for federal tax purposes. However, in contrast to a partnership, a LLC may allow its owners to be involved in the management of the business without exposure to personal liability.

Advantages

Limited liability, reduced organizational costs, relaxed regulation, and flexible allocation of income/expenses.

THESE ARE THE MOST COMMON TYPES OF BUSINESS ORGANIZATION AND THE MOST FREQUENTLY ENCOUNTERED TAX CONSIDERATIONS. THIS MATERIAL IS NOT A SUBSTITUTE FOR COMPETENT LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS THE BASIS FOR DECISIONS AFFECTING THE LEGAL AND TAX STATUS OF THE ORGANIZATION.



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Small Business Assistance Center • 90 Daniel Drive, Avondale, PA 19311 • Phone (610) 444-1720