What is Partnership?

Posted by admin on November 4, 2009 - (0)

Businesses or business entities which are formed under partnership partners share with each other the profits or losses of the business undertaking in which they have all invested. If your home business has two or more people interested then this structure could suit you.

While considering the types of partnership, generally, there are two types of partners: general partners and limited partners. General partners have an obligation of strict liability to third parties injured by the Partnership. The liability of limited partners is limited to their investment in the partnership.

Partnership too has several characteristics which need to be clearly understood before settling for this structure. These again would depend on the resources at you disposal. The following points illustrate few of the characteristics of partnership.

Characteristics of Partnership

  • This structure has two or more co-owners engaged in business for profit. For the major part, the partners own the business assets together and are personally liable for business debts
  • With regard to profit sharing, in the absence of a partnership agreement, profits are shared equally amongst the partners. A partnership agreement, however, usually provides for the manner or arrangement in which profits and losses are to be shared
  • Each Partner is, jointly and severally, personally liable for debts and taxes of the partnership. For example, if the partnership assets are insufficient to satisfy a creditor’s claims, the partners’ personal assets are subject to attachment and liquidation to pay the business debts.
  • Each general partner is deemed the agent of the partnership. Therefore, if that partner was apparently carrying on partnership business, all general partners can be held liable for his dealings with third persons.
  • Each partner may be held jointly and severally liable for a co-partner’s wrongdoing
  • Technically, a partnership terminates upon the death, disability, or withdrawal of any one partner. However, most partnership agreements provide for these types of events with the share of the departed partner being purchased by the remaining partners in the partnership.
  • In the absence of a partnership agreement, each general partner has an equal right to participate in the management and control of the business. Disagreements in the ordinary course of partnership business are decided by a majority of the partners.
  • Unless otherwise provided in the partnership agreement, no one can become a member of the partnership without the consent of all partners. However, a partner may assign his share of the profits and losses and right to receive distributions

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What is Sole Proprietorship?

Posted by admin on November 4, 2009 - (0)

Having categorized the business into different types, you need to take a closer look at each of them so that you choose the right structure for your business.

In sole proprietorship business there is no legal no separate existence from its owner. All debts of the business are debts of the owner. It is a “sole” proprietor in the sense that the owner has no partners. A sole proprietorship essentially means a person does business in their own name and there is only one owner. A sole proprietorship is not a corporation, it does not pay corporate taxes. Instead of that the person who organized the business pays personal income taxes on the profits made, making accounting much simpler. A sole proprietorship also does away with double taxation which happens in big corporations.

This form of business structure has its own advantages and disadvantages, a few of them are as follows:

Advantages of Sole Proprietorship
You could opt for this structure owing to the numerous benefits it provides for small businesses

  • Among the primary benefit it provides is the singular ownership. The makes business transactions and dealings easy
  • This form of structure also provides an easy estimation of the functioning and performance of the business
  • There is better control and business administration possible since there is only one owner
  • This also enables easy and speedy decision making since there is no hierarchy to seek approval from
  • In most cases, there are no legal formalities to forming or dissolving a business

Disadvantages of Sole Proprietorship

  • A sole proprietorship business finds it difficult to raise it finances and capital since shares of the business cannot be sold
  • Its sense of legitimacy is limited and smaller when compared to a corporation or limited liability company
  • This form of business will have unlimited liability, therefore, if the business is sued, it is the proprietor’s problem
  • Another disadvantage of a sole proprietorship is that as a business becomes successful, the risks accompanying the business tend to grow. To minimize those risks, a sole proprietor has the option of forming a limited liability company.

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How to Choose a Small Business Structure?

Posted by admin on November 4, 2009 - (0)

One of the most important choice you make while starting your business is the type of legal structure you select for your company. This decision has a direct bearing on not only your financial operations of your firms such as how much you pay in taxes but also determines the personal liability you face, your ability to raise money and the amount of paperwork for your business.

Hence it becomes quintessential to get this decision right before starting your business. This decision involves proper legal and financial guidance and should not be taken alone. It’s always advisable to consult the experts as Mr. Kalish, an entrepreneur himself suggests, “What structure you choose makes the most sense. He further says that it’s important for business owners to seek expert advice from business professionals when considering the pros and cons of various business entities.

Also the type of business entity you choose would depend on three primary factors: liability, taxation and record-keeping. So, of the different types of business entities that exist, a few major ones which bring out the differences in these aspects are as follows:

1. Sole proprietorship
This is the most common form of business organization. It’s easy to form and offers complete managerial control and powers to the owner of the business. However, the owner is also personally liable for all financial obligations of the business.

2. Partnership
Partnership involves two or more people who agree to share the profits or losses of a business. A primary advantage is that the partnership does not bear the tax burden of profits or the benefit of losses-profits or losses are “passed through” to partners to report on their individual income tax returns. As against this advantage, a primary disadvantage is the liability aspect—- each partner is personally liable for the financial obligations of the business.

3. Corporation
It is a legal entity that is created to conduct business. The corporation becomes an entity-separate from those who founded it-that handles the responsibilities of the organization. Like a person, the corporation can be taxed and can be held legally liable for its actions. The corporation can also make a profit. The key benefit of corporate status is the avoidance of personal liability. The primary disadvantage is the cost to form a corporation and the extensive record-keeping that’s required. allowing income or losses to be passed through on individual tax returns, similar to a partnership.

4. Limited liability company (LLC)
This is a hybrid form of partnership that is gaining in popularity because it allows owners to take advantage of the benefits of both the corporation and partnership forms of business. As the name suggests, this form of a structure has certain characteristic of a corporation and some characteristics of a partnership. The advantages of this business format are that profits and losses can be passed through to owners without taxation of the business itself while owners are shielded from personal liability.

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