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Since business
structures grow out of legal requirements, a business operator should
consider these requirements first when assessing various options.
Legally, each type of structure has its advantages and disadvantages.
Sole
Proprietorship
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Advantages
- Few
government and legal formalities exist.
- Formation
is easy, usually involving a simple registration with some
legal authority.
- Conversion
to a corporation can be done easily later.
- Easy
to wind down.
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Disadvantages
- The
owner is personally liable for all debts and obligations
of the business.
- The
business can often be perceived as a short-term, amateur
operation.
- Some
government loan programs are not available to unincorporated
businesses.
- No
name protection.
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Partnership
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Advantages
- Like
a sole proprietorship, a partnership is simple.
- Formation
is easy, merely requiring the partners’ names on the
registration.
- Shared
expertise.
- Opportunity
to acquire new skills.
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Disadvantages
- Partners
are personally liable.
- Partners
should have some kind of partnership agreement contract
in place to govern apportionment of capital, profits, legal
responsibility, tax liability, and other business issues.
- Partners
might not “get along” and the business might
have to be wound up.
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Corporation
Advantages
- Shareholders
are not personally responsible (or liable) for any obligations
of the company, unless a shareholder has signed a personal
guarantee.
- The
corporation continues regardless of whether a shareholder
leaves.
- Corporations
sometimes imply higher prestige, or more solidity.
- Because
shareholders can come and go, stability increases.
- A
corporation can covert itself to a public corporation
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Disadvantages
- Directors
can be held personally liable.
- Costs
of incorporation are much higher than with a sole proprietorship
or partnership.
- There
is more paperwork involved in operating a corporation.
- You
may be required to keep payroll records
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