There are several different forms of business organizations available. This refers to the legal arrangements of the business. The form you choose for your business is the form that best suits your purposes. There are different legal and tax implications of each.
The three forms are sole proprietor, partnership and corporation.
A sole proprietor is an individual who is in business for himself. He supplies all of the skill, knowledge and capital for the business. He performs all of the business functions associated with the business. He receives all of the profit which is taxed at individual income tax rates. He also bears all of the liability. There is no distinction between his personal assets and the assets of the business.
A partnership is when two people go into business together. They supply all of the capital and skill and knowledge. They perform all of the business functions. They share the profits and liabilities. The profits of the partnership are taxed at individual income tax rates. As with the sole proprietorship, there is no distinction between the assets of the business and the assets of its partners. This means that each partner is responsible for the business debts of the other partner.
A corporation is owned by its stockholders. It is a legal entity in its own and has all of the rights and responsibilities of a legal person. The corporation is responsible for its own debts. The assets of corporation are subject to the claims of its creditors; the assets of the stockholder or owners are not. This is one of the big advantages of the corporate form of business. The owners are not legally liable for the liabilities of the corporation although they can be sued or held responsibilities for some criminal activities. The corporation pays its own taxes, taxed at the corporate tax rate. However, the stockholders receive a share of the corporation's profits in the form of dividends. Dividends are taxed at the individual's tax rate. Dividends are a part of corporate profits that are taxed twice, once at the corporate tax rate and again at the individual tax rate.
When deciding which form of business organization is best, you may want to seek advice from your lawyer and accountant. There are advantages and disadvantages to each form of business and which one is best for your particular business depends on legal and tax considerations.
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