"Your Guideline to Credit Stability"
"Your Guideline To Credit Stability"


One of the first decisions you will need to make is how you want to organize your
business. This is an important decision with long-term implications. Consult with an
accountant or attorney to help determine what form is best for you. In making your
decision, you should consider the following:
dot Your vision for the nature and size of your business.
dotThe level of control you want to have.
dot Your business’s susceptibility to lawsuits.
dot Tax implications of various structures.
dotNeed for reinvesting earnings into business.
dotThe level of structure you want to have.

The majority of small businesses start as sole proprietorships. Sole proprietorships are
owned by a single person, who is usually also the person responsible for running the
business. All assets are owned by the sole proprietor and also all profits earned. Sole
proprietors are also responsible for all liabilities and debts. To the law, and for tax
purposes, the owner and the company are the same.

Advantages of a Sole Proprietorship

dot Easy and inexpensive to organize.
dotOwner is in complete control.
dot Owners decide whether to keep profits earned or reinvest them in the company.
dot Profits go directly to the owner’s personal tax return.
dot Easily dissolved.

Disadvantages of a Sole Proprietorship

dot Owners have unlimited liability and are solely responsible for debts and liabilities.
This means that their business and personal assets are at risk.
dot Sole proprietorships are at a disadvantage in raising funds and are usually limited to
using consumer loans or personal savings.
dot Potential employees may be discouraged by the fact that they cannot own part of
the business.
dotSome employee benefits are only partially deductible from business income.

A partnership is a company owned by two or more partners. Like a sole proprietorship,
the law does not distinguish between the owners and the business. Partners should set
forth legal agreements as to how decisions will be made, how profits will be shared, etc.
There are also three types of partnerships that can be formed:

1. General Partnership
Management responsibilities, profits and/or losses, and liability are shared equally
among partners according to an internal agreement.

2. Limited Partnership/Partnership with Limited Liability
Some partners have limited liability (equal to their investment) and limited input to
management decisions. More complex and formal than a general partnership.

3. Joint Venture
Acts like a partnership for a limited time period or a single project.

Advantages of a Partnership

dot Easy to establish.
dotMultiple owners mean that partners can be found with complimenting skills.
dot Employees may be attracted to the idea of joining a company in which they can
become a partner.
dotProfits go directly to partners’ personal tax returns.
dot The ability to raise funds may increase with multiple owners.

Disadvantages of a Partnership

dotPartners are liable for not only their own decisions, but also those of their partners.
dot Profits are shared between partners.
dotDisagreements may arise between partners when making decisions.
dotPartnership may end at the withdrawal or death of a partner.
dot Some employee benefits are not tax deductible.


A corporation is filed in the state in which it is headquartered and is recognized as a
legal entity separate from its owners. The owners of a corporation are shareholders and
elect a board of directors to make decisions for the company. A corporation can be
taxed, sued, and enter into contracts. A corporation does not dissolve when its
ownership changes and has an unlimited life.

Advantages of a Corporation

dot Shareholders have limited liability for the corporation’s debt or in the case of legal
judgments made against the corporation.
dot Can raise money by selling stock.
dotBenefits offered to employees are tax deductible.

Disadvantages of a Corporation

dot Requires more time and money to organize.
dot May result in higher overall taxes.
dot Monitored by government agencies and may have to complete paperwork to
comply with regulations.

A limited liability company, or LLC, is a new form of business ownership unlike a
partnership or corporation. LLCs combine the corporate advantages of limited liability
with the tax efficiencies of a partnership. Thus, formation of an LLC is more complex
than that of a general partnership. An LLC is owned by members whose ownership is
represented by their “interests”. “Interest” in an LLC is similar to “interest” in a
partnership or stock ownership in a corporation. Depending on how an LLC is managed,
its members may resemble partners in a partnership or shareholders in a corporation. If
members choose to have managers manage their company, they will act more like
shareholders. If they manage their company, they will be similar to partners.

Advantages of a Limited Liability Company

dotLLCs allow pass-through taxation, meaning that earnings are taxed only once.
dotThe LLC owner’s liability is limited to what they have invested in the LLC.
dot LLCs are allowed to establish any organizational structure, allowing them to
separate profit and voting interests.

Disadvantages of a Limited Liability Company

dot More paperwork is required to form an LLC and documents must be filed at the
state level.
dotSome states require a dissolution date to be included in the articles of organization.
Unlike a corporation, which has unlimited life, certain events can be dissolution
events for an LLC, such as death of a partner or bankruptcy.
dot LLCs are a relatively new form of ownership and thus less familiar.



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