• Sat. May 15th, 2021

Differences Between Corporations and Sole Proprietorships

ByArlene Huff

Jan 21, 2021

There are many aspects of a business, you must carefully consider before you establish it. The company structure you select impacts everything from day-to-day operations, to taxes, how much of your personal resources are at stake. Ideally, you should select a business structure which provides you with the proper balance of advantages and legal protections. Ultimately, your business structure greatly impacts how much money you make in your business, your ability to increase capital, the time you spend processing credit cards, and the amount of time you devote to actual work.

One of the best ways to ensure that you are protecting your assets is to establish an entity known as a corporation. A corporation is a separate legal entity from its shareholders or owners. Because of this, if something happens and one of the corporations owners is harmed, there is no danger of the other shareholders or owners being liable. In addition, a corporation has advantages in terms of taxation.

Corporations are frequently the favored structure for new businesses because they are able to enjoy several tax benefits, including tax exempt status. Tax exempt status allows a corporation to depreciate its assets instead of paying capital gains tax or gaining income tax on its profits. The corporation is also exempt from paying payroll taxes on its employees’ wages, as well as other expenses. This allows the corporation to use the funds it makes from the corporation for its own operating expenses.

Another advantage of corporations is that they have the advantages of limited liability. Because they are formally recognized as legal entities separate from their shareholders, corporations are able to limit their personal liability to their creditors and their shareholders. They may also elect their officers by-laws, although they are under no obligation to do so. Lastly, corporations are able to hire professional management teams, called officers, who serve as its representatives and are also not obliged to report to the board of directors.

Because corporations have many of the same features of a business organization, many people confuse a corporation with a sole proprietorship. However, a sole proprietor is liable for the debts and obligations of the business organization and cannot make decisions for the business itself. A corporation is entirely separate from its owners, and its officers cannot personally do anything that will affect the ownership structure of the corporation. Also, corporations are not subjected to the conflicts of interest laws that exist in partnerships and personal businesses, so there is no reason to incorporate a business entity in order to avoid these conflicts.

Although, some business structures, like sole proprietorships, can be effective and beneficial, they have disadvantages that make them undesirable for most businesses. These include the high costs involved in establishing the corporation, the time required to maintain the status, and the amount of money needed to pay the taxes that business owners would have to pay. Also, in order for a corporation to be successful, it has to have many shareholders who can easily contribute funds to finance its growth. Because this is not possible in many cases, most corporations are started from the bottom up, by individual entrepreneurs who are interested in making their own venture. This method is much faster than starting from scratch and allows the entrepreneur to retain control of his company in the early stages of its development, when he does not yet need to worry about financing his ventures.

Arlene Huff

Arlene Huff is the founding member of Golden State Online. Before that She was a general assignment reporter. A native Californian, she graduated from the University of California with a degree in medical anthropology and global health. She currently lives in Los Angeles.

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