Forms of Business Ownership
Matt Bacak

Forms of Business Ownership

One of the first decisions that you will have to make as a
business owner is how the company should be structured.
This decision will have long-term implications, so consult
with an accountant and attorney to help you select the form
of ownership that is right for you. In making a choice, you
will want to take into account the following:
- Your vision regarding the size and nature of your
business.
- The level of control you wish to have.
- The level of structure you are willing to deal with.
- The business' vulnerability to lawsuits.
- Tax implications of the different ownership structures.
- Expected profit (or loss) of the business.
- Whether or not you need to reinvest earnings into the
business.
- Your need for access to cash out of the business for
yourself.

Sole Proprietorships
The vast majority of small businesses start out as sole
proprietorships. These firms are owned by one person,
usually the individual who has day-to-day responsibilities
for running the business. Sole proprietors own all the
assets of the business and the profits generated by it.
They also assume complete responsibility for any of its
liabilities or debts. In the eyes of the law and the
public, you are one in the same with the business.

Advantages of a Sole Proprietorship
- Easiest and least expensive form of ownership to
organize.
- Sole proprietors are in complete control, and within the
parameters of the law, may make decisions as they see fit.
- Sole proprietors receive all income generated by the
business to keep or reinvest.
- Profits from the business flow directly to the owner's
personal tax return.
- The business is easy to dissolve, if desired.

Disadvantages of a Sole Proprietorship
- Sole proprietors have unlimited liability and are legally
responsible for all debts against the business. Their
business and personal assets are at risk.
- May be at a disadvantage in raising funds and are often
limited to using funds from personal savings or consumer
loans.
- May have a hard time attracting high-caliber employees or
those that are motivated by the opportunity to own a part
of the business.
- Some employee benefits such as owner's medical insurance
premiums are not directly deductible from business income
(only partially deductible as an adjustment to income).

Federal Tax Forms for Sole Proprietorship (only a partial
list and some may not apply)
- Form 1040: Individual Income Tax Return
- Schedule C: Profit or Loss from Business (or Schedule
C-EZ)
- Schedule SE: Self-Employment Tax
- Form 1040-ES: Estimated Tax for Individuals
- Form 4562: Depreciation and Amortization
- Form 8829: Expenses for Business Use of your Home
- Employment Tax Forms

Partnerships
In a Partnership, two or more people share ownership of a
single business. Like proprietorships, the law does not
distinguish between the business and its owners. The
partners should have a legal agreement that sets forth how
decisions will be made, profits will be shared, disputes
will be resolved, how future partners will be admitted to
the partnership, how partners can be bought out, and what
steps will be taken to dissolve the partnership when
needed. Yes, it's hard to think about a breakup when the
business is just getting started, but many partnerships
split up at crisis times, and unless there is a defined
process, there will be even greater problems. They also
must decide up-front how much time and capital each will
contribute, etc.

Advantages of a Partnership
- Partnerships are relatively easy to establish; however
time should be invested in developing the partnership
agreement.
- With more than one owner, the ability to raise funds may
be increased.
- The profits from the business flow directly through to
the partners' personal tax returns.
- Prospective employees may be attracted to the business if
given the incentive to become a partner.
- The business usually will benefit from partners who have
complementary skills.

Disadvantages of a Partnership
- Partners are jointly and individually liable for the
actions of the other partners.
- Profits must be shared with others.
- Since decisions are shared, disagreements can occur.
- Some employee benefits are not deductible from business
income on tax returns.
- The partnership may have a limited life; it may end upon
the withdrawal or death of a partner.

Types of Partnerships that should be considered:
- General Partnership
Partners divide responsibility for management and liability
as well as the shares of profit or loss according to their
internal agreement. Equal shares are assumed unless there
is a written agreement that states differently.

Limited Partnership and Partnership with limited liability
Limited means that most of the partners have limited
liability (to the extent of their investment) as well as
limited input regarding management decisions, which
generally encourages investors for short-term projects or
for investing in capital assets. This form of ownership is
not often used for operating retail or service businesses.
Forming a limited partnership is more complex and formal
than that of a general partnership.

Joint Venture
Acts like a general partnership, but is clearly for a
limited period of time or a single project. If the partners
in a joint venture repeat the activity, they will be
recognized as an ongoing partnership and will have to file
as such as well as distribute accumulated partnership
assets upon dissolution of the entity.

Federal Tax Forms for Partnerships (only a partial list and
some may not apply)
Form 1065: Partnership Return of Income
Form 1065 K-1: Partner's Share of Income, Credit,
Deductions
Form 4562: Depreciation
Form 1040: Individual Income Tax Return Schedule E:
Supplemental Income and Loss Schedule SE: Self-Employment
Tax
Form 1040-ES: Estimated Tax for Individuals
Employment Tax Forms


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