legal forms of business

November 3, 2006 7:33am CST
sole proprietorship, parnership and limited company
1 response
• United States
3 Nov 06
A sole proprietorship is a company owned by a single individual. All profits of the company are the property of the individual and are counted as income to the individual. The individual owner is responsible for all actions of the company and all of his/her assets are at risk in a lawsuit as there is no distinction made legally between the company and other property. Thus, if one of your employees has an accident while driving on company business the owner could lose there home and other personal possessions as well as the assets of the company in a lawsuit. A partnership is a company owned by two or more individuals. Profits are divided in proportion to each partner's equity stake in the business. Each partner's profits are taxed as ordinary income as in a sole proprietorship. However, each partner has unlimited liability for all debts of the company. Again, if one person has a 99% equity stake in the company and another a 1% and the company loses a major lawsuit the partner with the 99% stake will technically be liable for 99% of the settlement. BUT, if this partner has no assets outside of the business and if those are not sufficient to cover the amount due, the partner with the 1% stake will be liable for the balance. If by "limited company" you mean an LLC or Limited Liability Corporation formed under the laws of one of the 50 U.S. states then this is a company that acts like a corporation in that liability for the company's debts is limited to the assets of the company meaning that in a worst case scenerio the owners can lose no more than what they have invested in the company - their personal assets are safe. In this sense the company is the same as a corporation. However, in the case of profits, these are taxed just like sole proprietorships and partnerships in that they are passed directly to the owners and are taxed once as the income of each owner. This is not like a corporation where the company has to pay income taxes on the profits and then the owners have to pay again on any remaining profits, after corporate taxes, that they receive. LLCs are new and have not been fully tested in the courts. However, they are easy and inexpensive to form. Each state's laws are similar but there can be differences. See an accountant and/or attorney if you are unsure or have more complex questions. However, in most cases the paper work can be easily completed by an individual without help.