LIT1 Task 1 Part A
SOLE PROPRIETORSHIP: A business that is owned by one person and is not incorporated. Sole proprietorships are easy to start. You don’t need a lawyer and you don’t need to register with the government except to obtain a business license or permit where required.
* Liability: The owner is liable for all debts incurred by the business. His personal property can be attached. He is also responsible for any damage an employee may cause while working for him.
* Income Taxes: The owner pays ordinary income tax on all profits. This can be an advantage because most of the time personal tax rates are lower than corporate ...view middle of the document...
GENERAL PARTNERSHIP: A business that is owned by two or more people and is not incorporated. The partners share equally in the responsibility, the debts, and the liability unless otherwise stipulated.
* Liability: Each owner is personally liable for the debts incurred by the business whether he caused them or not. Also each partner is personally liable for the actions of the other partners and employees of the business. Personal property can be attached.
* Income taxes: A partnership does not pay taxes. All profits are passed through to the partners and taxed as ordinary income. The partners will have to pay self-employment tax. Appropriate payroll taxes need to be paid on employees. The business needs to register for an EIN.
* Longevity/ Continuity: When a partnership will terminate depends on the partnership agreement, the solvency of the business, and if the partners are all alive. The partners can bring more partners in as long as they are all in agreement.
* Control: All partners have equal control over the business unless otherwise specified. Some large partnerships have management committees that run the day to day business.
* Profit Retention: Profits are passed through to the partners. They are distributed equally unless otherwise agreed upon.
* Location: There are no special forms to file when moving from state to state except for business licenses and permits. State taxes will be assessed on the profits at the personal income rate.
* Convenience/ Burden: There is no requirement for government approval of the business organization. There may be a need for special licenses or permits.
LIMITED PARTNERSHIP: There are both general partners and limited partners in a limited partnership. Limited partnerships have to be formed in compliance with state law. Limited partners do not manage the business.
* Liability: Each general partner is personally liable for the debts incurred by the business. They have “Unlimited Liability”. Limited partners can only lose the amount of their investment.
* Income taxes: All profits are passed through to the partners who pay ordinary income tax on their share. General partners will have to pay self-employment taxes. Limited partners do not pay self-employment tax since they are passive investors and not considered self-employed. Employee payroll taxes need to be paid. The business needs an EIN.
* Longevity/ Continuity: The limited partnership will end if the limited partners become general partners. This requires approval of all partners. Limited partners and general partners can leave or be replaced without dissolving the limited partnership.
* Control: The general partners manage the day to day business and have control over the business. The limited partners are only investors and have no control over the management of the business.
* Profit retention: Profits are passed through to the partners.