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Lit1 Task 1 Essay

3996 words - 16 pages

Introduction:

The three basic legal forms of businesses in the United States are Sole Proprietorships, Partnerships, and Corporations. However, each of these forms can have variations and a hybrid called a limited liability company can be formed in all US States that exhibit the characteristics of both a partnership and a corporation (American College, n.d.). The following are some of the forms of business existing in the United States and their characteristics:

a. Sole proprietorship
b. General partnership
c. Limited partnership
d. C-corporation
e. S-corporation
f. Limited Liability Company

This report contains an overview of some of the ...view middle of the document...

The income and expense of the business is reported in the personal tax return of the sole proprietor. The form used by the Sole Proprietor is Form 1040 together with the Schedule C or the Profit or Loss from Business or Profession. The business profit of a sole proprietorship is treated as self-employment income, so salaries of the owner are not an expense item. Only salaries of employees and payroll taxes are allowed as business expenses (Perez, 2009).

Longevity or continuity of the organization: The life of the sole proprietorship is terminated at the death of the owner. Under state laws, all the business activities of a sole proprietorship will cease upon the death of the owner, except if the owner left a Last Will and Testament expressly stating that the business should be continued upon his death. Upon the owner’s death, whether the business is continued or not, the law provides that the representative of the owner must pay all of the personal and business debts of the owner out of the deceased assets.

Control: The sole proprietor has sole control of the business and it is his decisions that determine the fate of the business. Typically, the owner performs the managerial functions. Even if he hires others to run the business for him, he can decide to fire the manager or overrule his decisions anytime.

Profit retention: All the profits earned by the sole proprietorship becomes the personal income of the owner, so he can put in profits as additional capital or withdraw a portion or all of it. He can reduce his taxable income by charging expenses as costs of doing business.

Location: The sole proprietor uses Schedule C to report any profit or loss on his retail location or locations and attach it to Form 1040 (Smith, n.d.). Sole proprietors have to sell the entire business (including all assets and liabilities) to transfer ownership, but the buyer have to register the business under his own name.

Convenience or burden: A sole proprietorship is easy to start as they require no legal action to form. Generally, there are no formal requirements to operate this form of business except registering the business in the name of the sole proprietor if the business is known by a trade name. The owner usually manages the business, so small businesses can operate without worrying about paying a professional manager.

Advantages: The main advantage of the sole proprietorship is its simplicity and the minimal regulations that govern their formation and business operations. Usually, the business and personal income are combined in the sole proprietor’s tax returns and business losses are deducted from his gross income. Sole proprietorships can also be easily shut down upon the decision of the owner.

Disadvantages: The business owner he may lose his assets including his personal properties to pay creditors in case the business fails or incurs debts.

b) General partnership

A general partnership is a form of business...

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