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Various forms of business ownerships, and the way they are declared on tax forms, are considered very important. Different types of ownership are eligible for different tax deductions and incentives. Some of the most common forms of business ownerships include sole proprietorships, partnerships, and corporations. Other, less common forms include limited liability companies (LLC) and subchapter S corporations. Depending on geographic location, other types of ownership may be available.
A sole proprietorship is a business owned by only one person, and many small businesses initially begin with sole ownership. All the profits earned by the business are the property of the owner, and the single owner is responsible for all the debt incurred by the business. Sole ownership is often preferable to those who do not wish to share decision-making or profits. In addition, forms of business ownerships with a single owner do not require extensive legal paperwork to establish. One of the primary disadvantages to sole proprietorship is that any debts related to the business can frequently be levied against the owner’s personal property.
Two or more people must claim ownership of a business in order for it to qualify as a partnership. In order to be successful, partnerships should be entered into with a signed agreement from all parties. This agreement should outline responsibilities and rewards, and how they will be split among the owners. Some advantages to partnerships include having others to help share the burden of running the business and the benefits of combined talents resulting from having more than one person in charge. Some of the disadvantages include the possibility or serious disagreements among the partners and having to assume liability for the business behavior of partners.
A corporation is a type of business ownership that basically has its own identity, and from a legal perspective, it is a considered a single entity. People who have ownership in a corporation are called shareholders. Even though they have ownership, shareholders are not personally liable for the debts of the business. If a corporation fails, resulting debts cannot be levied against personal property of the shareholders. The main disadvantages to incorporating a business is the expense of the paperwork involved to set up and maintain the corporation and the possibility of higher taxation.
An LLC is a type of company that has some of the elements of both a corporation and a partnership. The owners serve as members of a common board and share in profits, expenses, and decision-making. Forms of business ownerships such as these do not completely shelter partners from personal financial liability, but they do offer some protection not provided under standard partnership agreements.