An unincorporated business that is owned by one individual is a sole proprietorship. This is the simplest form of organization to start with, and is easy to maintain. The business has no existence apart from the owner. All the liabilities are his personal liabilities. The owner undertakes the risk of the business for all assets owned. He is the only one who undertakes all the risks for all assets owned. The owner includes all the income and expenses of the business in his own tax returns.
Recognizing a sole proprietorship business
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A provision store, in the neighborhood. One person owns this, although he keep a man to work for him, but he is the only one to mange and he feel responsible for everything that went wrong in his business. All the profits are his profits and the man who is working gets just the salary, which is fixed.
He pays his income tax, his self employment taxes, his employment taxes which includes,
- Social security and Medicare taxes and income tax with holding.
- Federal unemployment (FUTA) tax.
- Depositing employment taxes.
Others are Excise taxes. All the taxes were paid on all the profit he makes. This also makes accounting so much easier. Whatever debts he is taking are his own debts.
An entrepreneur go for this sole proprietorship legal structure because of the advantages in small businesses. There is better control, and good administration which is possible because of one owner. He is the only one to make decision , which is again quicker without having to consult others. In most cases there are no legal bondings in formation or dissolution of the business.
The business organised in this way will likely to have hard time raising capital since shares of the business cannot be sold, and there is less sense of ligitimacy relative to a business organised as corporation or limited libity company. Hiring employees may also be difficult. If the business is sued it is the proprietor who is in problem.
Another disadvantage of this is if the business expands a lot the he might have to form a limited liability company.
In our case of provision store, if the owner wants to open a chain of these provision store or he might want to develop into a supermarket, then he has to switch from sole proprietorship to limited liability firm.
Geeneral Partnership Firm
A partnership is one in which each of the partners is liable for all of the firm's debts, and the actions of one partner are binding on each of the other partners
An arrangement in which partner’s conducts a business jointly have unlimited liability, which means their personal assets are liable to the partnership's obligations.
In this case all partners have unlimited liability, thus even innocent partners can be held responsible when another partner commits inappropriate or illegal actions. This fact alone shows how an investor should be caution when deciding on whether to become a general partner or not.
And such an organization with General Partners, each partner is liable beyond the amount invested, and each may bind the entire partnership. Typically, a general partnership is not a taxable entity because its income and losses are passed through to the partners. Compare with limited partnership
A partnership is created by contract, which is basically an agreement between the partners. It is not necessary that it should be documented; the partnership can be mutual, as in the case of a joint family in the business. But necessarily a business has to be there. The division of profit is an essential condition of the existence of the partnership.
Example: Mr. Adams, Mr. Barker, and Mr. Connell form a general partnership with ownership interest of 40%, 30%, and 30%, respectively. They will share taxable income, losses, or Capital Gains in that proportion. They trust one another and know that any one of them can bind them to a transaction.
Recognizing a partnership firm
There is a software development firm, it deals with web designing, software development for different companies, and they also do designing of Logos, front pages, catalogs etc, so they have a graphic department as well. One of the departments, which are the core department of the company, deals with marketing.
This firm has four partners, they have equal 25 percent of shares each, they have mutual understanding and they also invest in the company equally in one way or the other. Each one is responsible of one department. One partner looks after graphics one for marketing one for software development one take care of hardware and accounts.
The marketing department brings all the business, they hand over the work either to software or graphic department whichever is required, although both these department work together. Then comes into pictures that will look after all the payments and other financial matters.
All the profits are equally distributed among them. They pay the taxes, where firm is one entity, and all the profit of the firm has to be taxed and not the profits of individual owners. In case of any problem all the partners will stood together, and law suit will be against the firm and not against any single partner, so this is both the advantage and the disadvantage, if anyone person commits mistake all the partners have to face the repercussions.
A corporation is a legal person, which, while being composed of natural persons, exists completely separately from them. This separation gives the corporation unique powers which other legal entities lack. The law of the place of incorporation determines the extent and scope of its status and capacity.
The term corporation is often used to refer specifically to such business corporations in which investors and entrepreneurs often form joint stock companies and incorporate them to facilitate a business. Corporation may be formed for non-profit reasons; there could be political, religious or charitable corporations, government or quasi-governmental entities (public corporations).
In the eyes of law corporation is a fictional person, a legal person, or a moral person. United State recognize corporation as personhood. Under such doctrine, corporation can hold property like any person, signs binding contracts, pay taxes, have certain constitutional rights, and otherwise participate in society. A corporation enjoys many rights and obligations of individual person. (Note that corporations do not possess all the rights appertaining to individuals: in most jurisdictions, for example, a corporation cannot become a citizen and vote.
Member of corporation may be humans and other entities like trusts and other corporations. In profit making corporations these members hold shares in profit and are called shareholders. A corporation can exist without members; this is the case for non-profit corporation. In both categories, either profit or non-profit, a corporation has distinct legal entity and they have special privileges not provided to ordinary unincorporated businesses, or to voluntary associations, and to groups of individuals.
In the corporation there are board of directors who governs the corporation on behalf of the members. These members elect the directors, these board of directors has duty to look after the interest of corporation. The CEO, the president and other senior management is choosen by the board of directors to mamaneg the affairs of the corporation.
The bank being a creditor can also controls a part of the corporation, in return for lending money. Creditors can demand a control interest analogous to that of shareholder, including one or more seats on the board of directors. The differnce between the function of shareholder and creditors holding the position is that creditors cant be said to own the corporation. Although the creditor can overweigh the shareholder in practice, especially if the corporation is experiencing financial difficulties and cannot survive without credit.
If the corporation dissolves, members are the last to receive its assets, followed by creditors and others with interest in the corporation. This makes investment in corporation risky. This risk is outweighed by the corporation’s limited liability, which ensures that the members will only be liable for the amount the invested.
Example of a Corporation
Suzuki Motors is an multinational company, it has its board of directors they float there shares in the market; people can buy them when they announce public issues.
They have diversified into many countries, each a country has a Country Head who look after the affairs of the corporation, and their board of directors selects these country heads. The Managing director of the company is the one who had the maximum number of shares on his side. He with the help of the other directors chooses all the Officers in the company. These officers may or may not be shareholders in the company. They have to see that the company is growing fast and steady. This corporation is profit making and thus, it has to share his profits amongst the shareholders.
It’s the policy of these corporations to announce profits and publish them and mail this report to the shareholders. In these publications they can see all the accounting statements. They also pay taxes as per rule of the country they are doing business in. they also keep themselves transparent to the governmental structures of that company.
Then come non profit making companies, they have NGO’s and government corporation, We have Oxfam a corporation which is non profit making, help people but for working they employ all the people as in profit making organization.
Hamilton, Robert W., and Jonathan R. Macey, Cases on Corporations Including
Partnerships and Limited Liability Companies, 9th Ed., West Group, 2005.
The American Heritage® Dictionary of the English Language, Fourth Edition Copyright © 2004, 2000 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved.
Investment information about general partnership
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