The advantages
of sole proprietorship as a business form include: ease of establishment, no required business
taxes, and sole control of business decision-making. Sole proprietorships are easier to
establish than a partnership, which requires legal partnership agreements to be drawn up, or a
corporation, which requires an expensive and lengthy application for a government charter of
incorportation. Sole proprietors only pay personal income taxes on the profits of the business,
the business itself is not responsible for paying any taxes. Finally, the sole proprietor makes
all the business decisions for himself/herself, without potential conflict with a partner or
board of directors.
The chief advantages of a partnership include: ease of
raising capital, the ability to attract quality employees, and no required business taxes. It
is easier for a partnership to raise financial capital because partners represent a smaller risk
than a sole proprietor. If one partner defaults on a business loan, the bank can still collect
from the other partner(s). The possibility of "making partner," or being offered part
ownership in the business as a reward for hard work, is an incentive that partnership can offer
that sole proprietorships often cannot. For this reason, partnerships can often attract more
quality employess. Finally, like sole proprietorships, partners only have to pay personal
income taxes on their share of the profits. The business is not liable for business taxes as a
corporation would be.
A limited liability company (LLC) is a hybrid of a sole
proprietorship or partnership, and a corporation. While enjoying the advantage of not having to
pay business taxes like a corporation, the owners of an LLC are not liable for "the acts
and debts" of the business. This addresses a major disadvantage of sole proprietorships
and partnerships, unlimited liabilty, which means that the owners are personally liable for
judgements against the business.
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