1. Sole Proprietorship:
Definition:Â A sole proprietorship is the simplest and most common form of business structure where a single individual owns and operates the business. The owner is personally responsible for all business debts and liabilities.
Advantages:
Easy and inexpensive to establish.
Full control over business decisions.
Direct and straightforward tax reporting (reported on the owner's personal tax return).
Disadvantages:
Unlimited personal liability for business debts.
Limited ability to raise capital.
Business continuity relies heavily on the owner.
2. Limited Liability Company (LLC):
Definition:Â An LLC combines elements of both a partnership and a corporation, providing limited liability for its owners (members) while offering flexibility in management and taxation.
Advantages:
Limited personal liability, protecting the personal assets of members.
Flexible management structure.
Pass-through taxation (profits and losses pass through to the members' personal tax returns).
Easier administrative requirements compared to a corporation.
Disadvantages:
Some states may have additional reporting requirements.
Limited life of the company in some jurisdictions.
Not suitable for businesses looking to go public.
3. Corporation:
Definition:Â A corporation is a separate legal entity owned by shareholders. It provides limited liability to its owners and is managed by a board of directors.
Advantages:
Limited personal liability for shareholders.
Ability to raise capital through the sale of stocks.
Perpetual existence, not dependent on the status of individual owners.
Disadvantages:
Double taxation (profits are taxed at the corporate level and then again when distributed to shareholders as dividends).
Complex administrative requirements.
Stricter regulations and formalities.
4. Partnership:
Definition:Â A partnership is a business structure in which two or more individuals manage and operate a business in accordance with the terms and objectives set out in a Partnership Deed.
Advantages:
Easy to establish and formalize.
Pass-through taxation (profits and losses pass through to the partners' personal tax returns).
Shared decision-making and workload.
Disadvantages:
Unlimited personal liability for business debts.
Potential for disputes and disagreements between partners.
Limited ability to raise capital compared to a corporation.
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