Advantages and Disadvantages of Different Business Entities Case Study

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There are several different types of business entities, and they each come with advantages and disadvantages. The first type is the sole proprietorship. This type is best suited to a small business that is run by just one person, as the owner bears all of the liability. That means both financial and legal liability – should anything happen with the business, the owner is responsible. The owner's personal assets are therefore at risk, which has certain implications. Furthermore, business income flows through to the owner as personal income, and is therefore taxed at the personal rate, which is often higher than the business rate. Sole proprietorships are very easy to set up – there is basically no set-up, which makes them popular.

The second main type of business entity is the partnership. This type of entity has two or more people, and they share ownership. The terms of the partnership are laid out in the partnership agreement, and there can be many different variations of these terms. Each partnership is, in that way, different. Partners also have full liability for any legal action faced by the partnership, and they receive their income in a flow-through manner. For these reasons, partnerships are usually only set up with companies like law firms and accounting firms, where there is low risk, and where the partners can work together and police each other's behavior.

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A partnership can be easy to set up or quite difficult.

A third form of business entity is the corporation. The basic form of corporation is where the corporation is a legal entity of its own, and bears all of the liability and risk. Corporations, because they are a legal entity, they bear legal liability, not the owners. There are also variations on the corporation. A limited liability corporation (LLC) is a specific corporate form whereby the entity is structured as a corporation, and therefore has limited legal liability, but has flow-through taxation in the manner of a sole proprietorship or partnership. This form is popular for smaller businesses with limited ownership groups. One of the major downsides of an LLC is that it is not perpetual, as other corporations are, and therefore can be dissolved on the death of one of the owners (Investopedia, 2018).

An S corporation is a similar concept, with flow-through taxation but otherwise a corporate form. The S corporation has specific limits….....

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