Forms of Business Ownership
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Copyright © 2006 The Powerful Promoter
of the first decisions that you will have to make
as a business owner is how the company should be structured.
This decision will have long-term implications, so
consult with an accountant and attorney to help you
select the form of ownership that is right for you.
In making a choice, you will want to take into account
- Your vision regarding the size and nature of your
- The level of control you wish to have.
- The level of structure you are willing to deal with.
- The business' vulnerability to lawsuits.
- Tax implications of the different ownership structures.
- Expected profit (or loss) of the business.
- Whether or not you need to reinvest earnings into
- Your need for access to cash out of the business
The vast majority of small businesses start out as
sole proprietorships. These firms are owned by one
person, usually the individual who has day-to-day
responsibilities for running the business. Sole proprietors
own all the assets of the business and the profits
generated by it. They also assume complete responsibility
for any of its liabilities or debts. In the eyes of
the law and the public, you are one in the same with
of a Sole Proprietorship
- Easiest and least expensive form of ownership to
- Sole proprietors are in complete control, and within
the parameters of the law, may make decisions as they
- Sole proprietors receive all income generated by
the business to keep or reinvest.
- Profits from the business flow directly to the owner's
personal tax return.
- The business is easy to dissolve, if desired.
of a Sole Proprietorship
- Sole proprietors have unlimited liability and are
legally responsible for all debts against the business.
Their business and personal assets are at risk.
- May be at a disadvantage in raising funds and are
often limited to using funds from personal savings
or consumer loans.
- May have a hard time attracting high-caliber employees
or those that are motivated by the opportunity to
own a part of the business.
- Some employee benefits such as owner's medical insurance
premiums are not directly deductible from business
income (only partially deductible as an adjustment
Tax Forms for Sole Proprietorship (only a
partial list and some may not apply)
- Form 1040: Individual Income Tax Return
- Schedule C: Profit or Loss from Business (or Schedule
- Schedule SE: Self-Employment Tax
- Form 1040-ES: Estimated Tax for Individuals
- Form 4562: Depreciation and Amortization
- Form 8829: Expenses for Business Use of your Home
- Employment Tax Forms
In a Partnership, two or more people share ownership
of a single business. Like proprietorships, the law
does not distinguish between the business and its
owners. The partners should have a legal agreement
that sets forth how decisions will be made, profits
will be shared, disputes will be resolved, how future
partners will be admitted to the partnership, how
partners can be bought out, and what steps will be
taken to dissolve the partnership when needed. Yes,
it's hard to think about a breakup when the business
is just getting started, but many partnerships split
up at crisis times, and unless there is a defined
process, there will be even greater problems. They
also must decide up-front how much time and capital
each will contribute, etc.
of a Partnership
- Partnerships are relatively easy to establish; however
time should be invested in developing the partnership
- With more than one owner, the ability to raise funds
may be increased.
- The profits from the business flow directly through
to the partners' personal tax returns.
- Prospective employees may be attracted to the business
if given the incentive to become a partner.
- The business usually will benefit from partners
who have complementary skills.
of a Partnership
- Partners are jointly and individually liable for
the actions of the other partners.
- Profits must be shared with others.
- Since decisions are shared, disagreements can occur.
- Some employee benefits are not deductible from business
income on tax returns.
- The partnership may have a limited life; it may
end upon the withdrawal or death of a partner.
of Partnerships that should be considered:
- General Partnership
Partners divide responsibility for management and
liability as well as the shares of profit or loss
according to their internal agreement. Equal shares
are assumed unless there is a written agreement that
Partnership and Partnership with limited liability
Limited means that most of the partners have limited
liability (to the extent of their investment) as well
as limited input regarding management decisions, which
generally encourages investors for short-term projects
or for investing in capital assets. This form of ownership
is not often used for operating retail or service
businesses. Forming a limited partnership is more
complex and formal than that of a general partnership.
Acts like a general partnership, but is clearly for
a limited period of time or a single project. If the
partners in a joint venture repeat the activity, they
will be recognized as an ongoing partnership and will
have to file as such as well as distribute accumulated
partnership assets upon dissolution of the entity.
Tax Forms for Partnerships (only a partial
list and some may not apply)
Form 1065: Partnership Return of Income
Form 1065 K-1: Partner's Share of Income, Credit,
Form 4562: Depreciation
Form 1040: Individual Income Tax Return Schedule E:
Supplemental Income and Loss Schedule SE: Self-Employment
Form 1040-ES: Estimated Tax for Individuals
Employment Tax Forms
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