Principal Factors to Consider in Choosing a Form of Business Organization

By Carter McBride
Choosing the proper business entity is essential for the success of a business.

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Choosing a form of business is crucial to a successful organization. The choice of a business entity will depend on a case-by-case basis with what the owners of the business entity want to accomplish. The main types of business entities are sole proprietorships, partnerships and corporations. Each entity must sit down and carefully consider all the advantages and disadvantages of each type of entity before choosing what the business organization should be.

Formal Requirements

Generally, states require corporations to file documents, such as the corporation's articles of incorporation and by-laws with the state. Sole proprietorships and partnerships usually do not need to file any documents with the state, outside of tax documents.

Raising Capital

Corporations appear to have the easiest time raising capital, because they can sell equity ownership interest in the corporation. A sole proprietorship cannot sell any equity ownership and must rely solely on profit, and partnerships must admit new partners in order to introduce new capital.

Taxation

The Internal Revenue Service taxes sole proprietorships on an individual tax level. All profits and losses from the sole proprietorship belong on the owner's tax return. Partnerships must file a form "Schedule K-1," with all partner profits included. Schedule K-1 passes the partner's share of partnership profits and losses to the partner so the partnership profits and losses are taxed on the partner's level. Corporations are taxed on the corporate level, and individuals are taxed on an individual level when distributions are passed to the shareholders of the company.

Liability

Generally, a sole proprietor is liable for all debts and torts of a sole proprietorship business organization. In a partnership, partners are usually liable under agency law, and are liable for debts up to their particular capital contributions. Corporate shareholders are rarely liable for any actions of the corporation.

Entity

Corporations are considered a separate legal entity from their owners. A sole proprietorship is not legally separated from its owner. A partnership sometimes is treated as separate from its owners, depending on the situation. For example, a partnership can buy property as if it were one owner.

About the Author

Carter McBride started writing in 2007 with CMBA's IP section. He has written for Bureau of National Affairs, Inc and various websites. He received a CALI Award for The Actual Impact of MasterCard's Initial Public Offering in 2008. McBride is an attorney with a Juris Doctor from Case Western Reserve University and a Master of Science in accounting from the University of Connecticut.

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