Briefly discusses pros and cons of popular forms of business and how these business can reduce their liability exposure. Includes sole proprietorship, general partnerships, limited partnerships, corporations, and limited liability corporations.
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Pros and Cons of Popular Forms of Business
1. Pros & Cons of
Popular Forms of Business
Samantha McNair
2. Primary Business Entities
In owning and operating a business it is important
to understand the numerous forms of business
organizations available today. These types of
business organizations include :
• Sole Proprietorship
• General Partnership
• Limited Partnership
• Corporation (inc.)
• Limited Liability Corporation
3. Sole Proprietorship
Pros
• Simple formation.
• Owner is solely
responsible and does not
have to worry about
actions of partners.
• Taxed at personal income
level.
Cons
• Owner is solely
responsible and held
personally liable.
• Both business and
personal assets are liable
and subject to lawsuit.
• Does not qualify for
specific tax advantages
that corporations enjoy.
Reducing Liability: Ensure ethical and legal conduct, liability
insurance, and changing business to a LLC. Transfer or “sell” large
personal assets to spouse to limit exposure.
4. General Partnership
Pros
• More partners = more
money available for
investment.
• Responsibilities and
management can be divided
Cons
• Partners are all responsible
and held personally liable.
• Both business and personal
assets are liable and subject
to lawsuit.
• Unlimited liability for firm
debts.
Reducing Liability: Ensure ethical and legal conduct, liability
insurance, consider changing business to a limited partnership.
Transfer or “sell” large assets to spouse to limit exposure.
5. Limited Partnerships
Pros
• Owners are treated similar
to shareholders.
• No liability beyond loss of
investment (including
business debt).
Cons
• LP’s are held in accordance
with state statutes, where
requirements may vary.
Reducing Liability: Ensure ethical and legal conduct, employee
training in areas such as safety, diversity, and sexual harassment in
the workplace. Liability insurance is essential.
6. Corporations
Pros
• Business is viewed as a
separate entity from the
owners.
• Business is treated as an
artificial being with the ability
to own property, borrow
money, pay taxes, and be
sued.
• Owners are not personally
liable beyond their investment
in the company.
Cons
• Subject to double taxation
as corporation and
shareholders pay taxes on
profits.
Reducing Liability: Ensure ethical and legal conduct, employee
training in areas such as safety, diversity, and sexual harassment in
the workplace. Liability insurance is essential.
7. Limited Liability Corporations
Pros
• LLC’s avoid double taxation.
• Liability is limited to
corporate assets and
investments.
Cons
• Owners are held liable for
shareholder interests.
• Formation may require
assistance from an attorney.
Reducing Liability: Ensure ethical and legal conduct, employee
training in areas such as safety, diversity, and sexual harassment in
the workplace. Liability insurance is essential.