The Corporation is an entity type that I’m sure you are familiar with. Chances are good that if you are a regular Aridni reader, you might own stock in a few of them. A lot of companies are set up as corporations. The original concept of a corporation came from England, long before the US ever existed.

The problem was basically people who had money would not start businesses, because of the unlimited liability. The only options at this point were sole proprietorships and partnerships. If something went wrong, the person has everything to lose. You would be personally responsible for the companies debts and other obligations. If you have wealth, then this is certainly not an attractive option.

The British government came up with the idea of a corporation that allows for an entity type that allows you to have limited liability to stimulate the growth of business. This changed quite a bit of things as it made it so the most money you could potentially lose, would be only the amount that you invested.

During the first century and a half of America’s existence as a country, (Up until the very late 1900’s) a Corporation was the only entity type that would allow you the limited liability. This is why corporations are the only types of businesses that are traded on the open market. (with perhaps a few exceptions from small markets somewhere) In order for a company to issue stock through any of the big exchanges such as AMEX or NYSE, you are subject to regulations by both the particular stock exchange as well as the rules put in by the SEC.

Being as it was the only type of entity allowed at these markets, Corporations became the standard for American business. Which is interesting as the British Corporations were a big catalyst for the revolution. The Boston Tea Party against the English and the British East India Company being one of the biggest examples. This planted the idea in Americans that corporations are inherently evil, and of course many American Corporations haven’t really gone to any great lengths to improve it’s image. But that of course is another article for another blog!

So if the upside is that you are can’t lose more than you invest into the company, the downside is of course that you will be subject to double taxation. The company is taxed as it must report it’s income. Then you are personally taxed when you get paid from the company. This includes payment from salary, dividends, and even bonus. The issue is a huge issue that pretty much has to be accepted. Double taxation that affects all the shareholders, employees, and directors.

Corporations are also fairly complicated to organize and run. But that is another article in itself!

For corporations the pros are
+ Limited Liability
+ Tradeable on Most Exchanges
And the cons are
– Double Taxation
– Complicated to run and organize

In a nutshell, that’s some of the benefits and drawbacks of organizing your business as a corporation, as well as some history.

Partnerships have similar features to the sole proprietor entity type, with one major difference. It’s a fairly obvious difference and is simple as the name implies. A partnership has the same features as a sole proprietor, only it requires at least one partner.

If you go into business with another person, you assume the role of a partnership. As in a sole proprietorship, you have unlimited liability. Not only do you have the unlimited liability, but your partners do as well. If something goes terribly wrong in the working of your business, it is possible that your assets could be taken away, as well as those of your partners. Even personal things that are not associated with your business can be taken away from you. Having unlimited liability is undertaking a tremendous risk.

An upside to a partnership is that it is a ‘pass through’ entity. So any business expenses and losses can be tax deductible. On the same token, the money that your partnership makes is not taxed until it is in your personal hands.

Just as the sole proprietor can go into business by simply deciding to go into business, as partnership can be created just as easily. It doesn’t even require a handshake, but it could if you wanted it to.

The partners are bound to each other by a general ‘good faith’ agreement at the beginning, meaning that they will each work towards the goals of the group without trying to benefit themselves personally above anyone else in the partnership.

If the members of your partnership wanted a clearer set of rules to do business with, then you can set up a partnership agreement. This would define things such as your interests, your goals, and how members can leave or join. There are a million different things to consider in your partnership, and the agreement is a written (or oral in some cases) place to address these issues.

If one of the partners wants out (and can do so legally according to the partnership agreement), the partnership is dissolved and a new one with the remaining partners is automatically created.

We’ve hit the one year mark here at Aridni, come check out best articles from the first year. Katie’s favorites and Todd’s favorites.

Sole Proprietorship is the most basic type of entity, and also the easiest to start. The only thing required is that you think about going into business. Right then, you are now operating as a sole proprietor and can go into business. Depending on where you live you may need to get business licenses or permits depending on what your business intends to do.

The downside to Sole Proprietorships is that they do not have limited liability. So if something goes wrong and you get sued, it is possible that everything that you own personally could (and probably would be) taken away from you if the lawsuit is won.

The upside to a Sole Proprietorship is that it is a ‘pass through’ entity, This means that any earnings that you have are only taxed once. The money that you make is not taxed to the business, but only to you once as your salary. Included with this is tax deductions. When you are spending for your business, that money may be a tax break if you document it and it is justifiable for your business.

If you don’t establish a separate entity type, then this is the default type that you will assume as an individual. As you can see, the limited liability is quite the potential time bomb, even more so as you become more affluent in your life.