Organization

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Three Main Factors to Consider

Sole Proprietorship1

  • A proprietorship is a business owned by one individual. This person is responsible for the firm's policies, owns all its assets, and is personally liable for its debts.
  • Advantages
          1. Can be easily and inexpensively formed.
          2. Earnings are taxed at the owner's personal tax rate
  • Disadvantages
          1. Personal liability. If something goes wrong, you are responsible and your assets can be taken away.
          2. Cannot issue stocks and bonds.

Partnership2

  • A legal contract entered into by two or more persons in which each agrees to furnish a part of the capital and labor for a business enterprise, and by which each shares a fixed proportion of profits and losses.3
  • Advantages
          1. Earnings are taxed at the owner's personal tax rate
          2. Each partner only pays personal income tax on their share of a partnership's taxable income.
          3. Tend to have larger amount of capital
          4. Relatively easy to form
  • Disadvantages
          1. Each partner is held liable for a business' debts and their partner's actions. Your assets are not only secured by your own actions, but also the actions of your partner.
          2. If one partner can not pay their debts, the other partners must pick up the remaining portion of debt.

Corporations4

  • A corporation is a legal entity created un provincial or federal law. It is seperate from its owners and managers.
  • Advantages
          1. Can issue stocks and bonds to raise capital.
          2. Permits easy transfer of ownership interest.
          3. Limited liability, but can pierce the veil. In other words, if you do something really stupid they can come after your personal assets.
          4. Is taxed differently that sometimes benefits the corporation.
                  • Tax rates are progressive.
                  • Tax rates increase in stair-step fashion. (Four brackets for corporations and two surtax brackets).
                  • Exemptions and deductions often reduce the overall tax assessment.
  • (C) Corporation
    • Better for larger businesses.
    • No limit to the number of share holders it has.
  • Subchapter (S) Corporation
    • Better for smaller businesses.
    • Limited to 75 shareholders.

Limited Liability Company (LLC)5

  • Company is separate from the person.
  • Not liable for company undertakings of company's debt.
  • The IRS treats one-owner LLCs as sole proprietorship for tax purposes. This means the LLC itself does not pay taxes and does not have to file a return with the IRS.6

Limited Liability Partnership (LLP)7

  • US partnership in which no partner is liable for the negligent acts of any or all other partners or those of employee(s) not under his or her command.(LLP)8
  • The IRS treats co-owner LLCs (also referred to as LLPs) as partnerships for tax purposes. They do not pay taxes on business income; instead the LLC owners each pay taxes on their share of the profits on their personal income tax returns.9
  • Very popular in Oregon.
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