Sole Proprietorship
Sole proprietorships are often non legal entities. They are individually owned businesses where the owner is liable for all the profits and losses accrued (Fay, 1998). The simple nature of a sole proprietorship applies even in taxation. The income earned by the individual is what is taxed. Sole proprietors are expected to file Schedule C together with Form 1040 to necessitate the taxation process.
The is a high liability potential to a sole proprietor since the owner can be sued for any failure of the business, thereby involving his personal assets, retirement accounts, and bank account. It is difficult for this type of business to raise capital through selling part of the business interest, and the business can barely survive once the owner dies or suffers incapacitation of any kind (Fay, 1998).
However, this type of business has its advantages in the sense that it is inexpensive to establish and does not require complex ongoing formalities (Fay, 1998). The owner also has the freedom of mixing business with personal assets.
Partnership
A partnership entails forming a business owned by between 2 and 20 people. Partnerships are further subdivided into general or limited, where general partnership implies that the owners have equal responsibility in as far as management issues are concerned (Jackson, 2002).
Members also have unlimited liability where debts and obligations arise. Limited partnerships, on the other hand, entail a section of the partners enjoying limited liability status. Another section of the members, however, have unlimited liability status in case of debts or obligations. The limitation of liability is proportionally determined by the actual investment of the individuals.
Partnerships have the advantage of pooled skills, knowledge, and experience. In terms of taxation where partners include wife and husband, they stand a chance of benefiting from either total reprieve or only being taxed once as opposed to a situation where the two are running separate businesses. Limited partnerships specifically encourage capital investment in the business because of the limited liabilities.
The disadvantages of partnerships include clash of personalities, especially in the areas of administration and sharing of profits. A partner may end the business by opting to dissolve it even though other owners may wish to continue running it. Partners are also liable, both individually and collectively, to other partners’ defaults. This implies that partnerships are difficult to control in some instances (Jackson, 2002).
Corporation
Corporations are separate legal entities. Unlike sole proprietorship where the business is the same as the owner, corporations stand on their own separate from the proprietor (Fater, 2010). The shareholders and employees, thus, are not liable to any liability, debts, or obligations of the business.
Corporations, therefore, give members the full protection of their assets. Liability to the members only extends to the actual individual investment within the corporation (Ruther, 1996). Corporations also enjoy the ease of raising money because they issue stocks through which members of the public can contribute to capital through purchasing stocks. Transfer of ownership is also easier for corporations through transfer of the company’s stock to other stakeholders.
Corporations are disadvantageous by virtue of the fact that the business idea is never owned by any single individual; instead, it remains separate as a legal entity. Corporations are often headed by powerful boards that determine their course (Fater, 2010). As an individual who formed the corporation, the powerful board may end up overruling you and, in some instances, firing you where it feels you are against its set objectives.
Larson would better look for partners and form a partnership business. This will offer an avenue for comprehensive knowledge and skills that will in turn spur his business idea towards significant growth. Remaining as a sole proprietorship limits the scope of knowledge and skills that can be applied to the business.
References
Fater, D. H. (2010). Essentials of corporate and capital formation. Hoboken, NJ: John Wiley.
Fay, J. R. (1998). What form of ownership is best? The CPA Journal, 68(8), 46-50.
Jackson, T. (2002). The advantages and disadvantages of setting up an LLC. Air Conditioning, Heating & Refrigeration News, 216(14), 26-26.
Ruther, D. A. (1996). S-corporations can now take advantage of the benefits of foreign sales corporations. Ohio CPA Journal, 55(4), 77.