Comparison of Business Entities

7/30/2019 Comparison of Business Entities

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Comparison of Business Entities: Sole Proprietorship, Partnership, Corporation, LLC

Most companies have a tough time figuring out the right type of business entity for their business. Partnership?

Corporation? LLC? Following is a brief overview of the different entity types along with some basic advice. (For those

who like to cut to the chase, refer to the Rules of Thumb at the bottom of this post.)

Sole Proprietorship

A sole proprietorship is the simplest business entity to form. No paperwork needs to be filed- a sole proprietorship

generally comes into being when an individual begins conducting a new business (unless you form another legal

entity, such as a corporation or LLC). The business may be conducted under an assumed name, which is commonly

referred to as a DBA (doing business as). Note: there can be only one owner of a sole proprietorship (any more and

youll need to form a partnership, corporation or LLC).

General Partnership

A partnership is a business with two or more owners that has not formed another type of entity (i.e. corporation or

LLC). No paperwork needs to be filed to create a partnership, although drafting a partnership agreement at the outset

is recommended. There are two types of partnerships: general partnerships and limited partnerships. Typically

speaking, general partnerships are relatively simple to set up and run. Income and expenses pass through to

partners and all partners are treated equally. The main drawback of partnerships is that the partners bear personal

liability for the debts and obligations of the partnership. As a result, partnerships are not suitable for businesses that

engage in inherently risky activities (construction, machinery, food service, environmental risks, etc.).

Limited partnership

Limited partnerships are more complex to create and maintain than general partnerships. There are two types of

partners in a limited partnership: the general partner (who controls day-to-day operations and is liable for business

debts) and limited partners (who are not responsible for business debts or claims). The most common example of a

limited partnership is a real estate partnership in which one individual (the general partner) solicits investments from

other individuals (the limited partners) in order to purchase property. The general partner then manages the business

while the limited partners serve as passive investors. Limited partnerships generally involve the preparation of awritten partnership agreement, which can be complex because some partners may be treated differently than others.

In particular, limited partnerships provide the ability to allocate income/gains/losses/etc. differently among different

partners (called special allocations).

C Corporation

A corporation is a business entity that carries its own legal status, separate and distinct from its owners. As a result,

the primary advantage of corporations provide owners with limited liability against business claims (often referred to

as the corporate shield). There are two types of corporations: C corporations (often called regular corporations)

and S corporations. The primary disadvantage of C corporations is whats known as double taxation: profits are taxed

first at corporate tax rates (around 35% for federal and 9% for California) and then again at the individual level (i.e.

when owners receive profits from the corporation in the form of dividends, that income is fully taxable on theirpersonal tax return- hence, double taxation). C corporations are formed by filing articles of incorporation with the

Secretary of State.

S Corporation

An S corporation is a regular corporation that has special tax status (under Subchapter S of the IRS code- hence the

name). The main advantage of S corporations is that they do not pay federal income tax. Instead, income and/or

losses from S corporations pass through to shareholders in the same manner as partnerships (thats why

partnerships and S corporations are both referred to as pass-through entities.). In other words, S corporations avoid


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double taxation. Note: S corporations have certain restrictions that do not apply to C corporations (i.e. maximum of

100 shareholders, all shareholders must be U.S. citizens, and only one class of stock is allowed). S corporations are

formed the same way as C corporations- by filing articles of incorporation with the Secretary of State. Important note:

to elect S corporation status, you must file Form 2553 with the IRS within approximately two months of your

incorporation date- check with your lawyer or CPA for the details.

LLC (Limited Liability Company)

Over the past few years, LLCs have replaced S corporations as the most popular form of business organization for

new companies. The reason? LLCs combine the best attributes of corporations and partnerships: limited liability,

pass-through taxation, and flexibility in allocating profits and losses. Furthermore, LLCs arent subject to many of the

same restrictions as S corporations. The biggest drawback of LLCs is that their legal treatment varies by state,

making them a questionable choice for businesses that operate (or plan to operate) in multiple states. Much like

limited partnerships, LLCs are formed by filing Articles of Organization with the state and governed by an operating

agreement that looks a lot like a partnership agreement.

LLP (Limited Liability Partnership)

LLPs are a special type of partnership designed to provide individual partners with protection against malpractice by

other partners in the business. LLPs are primarily designed for professions such as doctors, lawyers and

accountants. As a result, theyre not really applicable to anybody else.

Rules of Thumb

1) Legal protection. No doubt about it- the need for limited liability is the single most important factor in choosing a

business entity for most companies. Rule of thumb: businesses that engage in risky activities should be conducted

through a limited liability entity- a corporation, LLC or (to a much lesser extent) limited partnership.

2) Tax issues. When it comes to taxes, sole proprietorships, partnerships and LLCs come out about even (theyre all

pass-through entities). As far as corporations are concerned, S corporations have a distinct advantage over C

corporations because they avoid double taxation. Rule of thumb: S corporations are the preferred choice for most

smaller companies (in particular, start-ups that expect to lose money for the first few years- because the losses can

then be passed through to shareholders personal tax returns).3) Cost and administration. Sole proprietorships and partnerships are the easiest to form and least expensive to

maintain. Corporations and LLCs are almost always more expensive to create and difficult to maintain. Rule of thumb:

if your business does not need limited liability protection and you want to keep it simple, consider sticking with a

sole proprietorship or partnership.

4) If youre considering forming an S corporation: take a look at an LLC instead (for all of the advantages mentioned

above).

5) When to choose an S corporation over an LLC: if your company plans to issue stock or stock options, or if your

company plans to operate in multiple states.

6) When to choose a C corporation over an S corporation: if the corporation has more than 100 shareholders, has

shareholders who are not U.S. citizens, or intends to file a public offering in the future.7) Be wary of changing from one entity type to another. A lot of people think they can simply convert to a different

entity in the future. While it is possible to do so, its never easy and can cause considerable headaches. In particular,

trying to convert a C corporation or S corporation to an LLC can trigger some very unpleasant tax consequences.

Last but not least: never put appreciating assets (such as real estate or liquid investments) into a C corporation.

When you sell them, youll pay double taxes. Go with a partnership instead.


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Regulatory Body- Financial Regulatory Bodies In India

Financial sector in India has experienced a better environment to grow with the presence of highercompetition. The financial system in India is regulated by independent regulators in the field ofbanking, insurance, mortgage and capital market. Government of India plays a significant role incontrolling the financial market in India.

Ministry of Finance, Government of India controls the financial sector in India. Every year the finance ministrypresents the annual budget on 28th February. The Reserve Bank of India is an apex institution in controlling bankingsystem in the country. It's monetary policy acts as a major weapon in India's financial market.

Securities and Exchange Board of India (SEBI), Functions of SEBISecurities and Exchange Board of India (SEBI) was first established in the year 1988 as a non-statutory bodyfor regulating the securities market. It became an autonomous body in 1992 and more powers were giventhrough an ordinance. Since then it regulates the market through its independent powers.Objectives of SEBI:

As an important entity in the market it works with following objectives:1. It tries to develop the securities market.2. Promotes Investors Interest.3. Makes rules and regulations for the securities market.Functions of SEBI:Find below SEBI's important functions:

1. Regulates Capital Market2. Checks Trading of securities.3. Checks the malpractices in securities market.4. It enhances investor's knowledge on market by providing education.5. It regulates the stockbrokers and sub-brokers.6. To promote Research and InvestigationSEBI in India's Capital Market:SEBI from time to time have adopted many rules and regulations for enhancing the Indian capital market. The recentinitiatives undertaken are as follows:Sole Control on Brokers:Under this rule every brokers and sub brokers have to get registration with SEBI and anystock exchange in India.For Underwriters:For working as an underwriter an asset limit of 20 lakhs has been fixed.For Share Prices

According to this law all Indian companies are free to determine their respective share prices and premiums on theshare prices.For Mutual FundsSEBI's introduction of SEBI (Mutual Funds) Regulation in 1993 is to have direct control on all mutual funds of bothpublic and private sector.

NSE India, National Stock Exchange IndiaIn the year 1991 Pherwani Committee recommended to establish National Stock Exchange (NSE) in India. In

1992 the Government of India authorized IDBI for establishing this exchange.In National Stock Exchange there is trading of equity shares, bonds and government securities. India's StockExchanges particularly National Stock Exchange has achieved world standards in the recent years. The NSEIndia ranked its 3rd position since last four years in terms of total number of trading per calendar year.Presently there are 24 stock exchanges in India, out of which 20 have exchanges National Stock Exchange (NSE),over the Counter Exchange of India Ltd, (OTCEI) and Inter-connected Stock Exchange of India limited (ISE) havenationwide trading facilities.

New NSE Reference RatesBoth MIBOR (Mumbai Inter Bank Offer Rate) and MIBID (Mumbai Inter Bank Bid Rate) are the two new referencesrates of the National Stock Exchanges. These two new reference rates were launched on June 15, 1998 for the loansof interbank call money market.Both MIBOR and MIBID work simultaneously. The MIBOR indicates lending rate for loans while MIBID is the rate forreceipts.

Bombay Stock Exchange, Bombay Stock Exchange India , BSE IndiaBombay Stock Exchange is one of the oldest stock exchanges in Asia was established in the year 1875 in thename of "The Native Share & Stock Brokers Association".


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Bombay Stock Exchange is located at Dalal Street, Mumbai, India. It got recognition in 1956 from the Governmentof India under Securities Contracts (Regulation) Act, 1956. Presently BSE SENSEX is recognized over the world.Trading volumes growth in the year 2004-05 have drawn the attention over the globe.

As to the statistics, the total turnover from BSE transcation as in June 2006 is calculated at 72013.36 crores.BSE Indices:The well-known BSE SENSEX is a value weighted of 30 scrips.

Other stock indices of BSE are BSE 500, BSEPSU, BSEMIDCAP, BSESMLCAP, and BSEBANKEX.BSE 100 Index:The equity share of 100 companies from the list of 5 major stock exchanges such as Mumbai, Calcutta, Delhi,

Ahmedabad and Madras are selected for the purpose of compiling the BSE National Index. The year 1983-84 istaken as the base year for this index. The method of compilation here is same as that of the BSE SENSEX.BSE 200 Index:The BSE 200 Index was lunched on 27th May 1994. The companies under BSE 200 have been selected on the basisof their market capitalisation, volumes of turnover and other findamental factors. The financial year 1989-90 has beenselected as the base year.BSE 500 Index:BSE 500 Index consisting of 500 scrips is functioning since 1999. Presently BSE 500 Index represents more than90% of the total market capitalisation on Bombay Stock Exchange Limited.BSE PSU Index:BSE PSU Index has been working since 4th June 2001. This index includes major Public Sector Undertakings listedin the Exchange. The BSE PSU Index tracks the performance of listed PSU stocks in the exchange.

Companies In BSE:Companies listed on the Bombay Stock is rising very fast. As to statistics, companies listed tothe end of March 1994 reached at 3,200 compared to 992 in 1980.

India Reserve Bank SystemReserve Bank of India is the apex monetary Institution of India. It is also called as the central bank of the

country. The bank was established on April1, 1935 according to the Reserve Bank of India act 1934. Itacts as the apex monetary authority of the country.

The preamble of the reserve bank of India is as follows:"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability inIndia and generally to operate the currency and credit system of the country to its advantage."

Foreign Investment Promotion BoardThe Foreign Investment Promotion Board is a special agency in India dealing with the matters relating to

Foreign Direct Investment. This special board was set up with a view to raise the volume of

investment to the country. The sole aim of the board is to create a base in the country by which alarger volume of investment can be drawn to the country.

On 18 February 2003, the board was transferred to the Department of Economic Affairs (DEA) Ministry of Finance.mportant functions of the Board are as follows:

Formulating proposals for the promotion of investment.

Steps to implement the proposals.

Setting friendly guidelines for facilitating more investors.

Inviting more companies to make investment.

To recommend the Government to have necessary actions for attracting more investment.

With regards to the structure of the Foreign Investment Promotion Board, the board comprises the following group ofsecretaries to the Government:

Secretary to Government Department of Economic Affairs, Ministry of Finance- Chairman.

Secretary to Government Department of Industrial Policy and Promotion, Ministry of commerce and Industry. Secretary to Government, Department of Commerce, Ministry of Commerce and Industry.

Secretary to Government, Economic Relations, Ministry of External Affairs.

Secretary to Government, Ministry of Overseas Indian Affairs.

In the recent years, particularly after the implementation of the new economic policy, the Government has undertakenmany steps to attract more investors for investing in the country. The new proposals for the foreign investment areallowed under the automatic route keeping in view the sectoral practices

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Comparison of Business Entities