Comparing Sole Proprietors vs. Close Corporations
The US Small Business Association advises those that want to open up a new business entity that the business structure that is chosen will have significant influences on “everything from day-to-day operations, to taxes and how much of your personal assets are at risk.” Entrepreneurs are therefore cautioned to choose a business structure that will provide the perfect balance of legal protections as well as benefits that encourage the growth of their business.
While you can convert to a different form of business structure at a later stage, business owners may encounter restrictions based on their location. This could have further implications with regards to tax consequences, unintended dissolutions, and other complications; it is, therefore, essential to choose carefully at the onset. In this article, we will look at Sole Proprietorship vs. Close Corporations.
Sole Proprietorships are seen as the simplest type of entity for a new startup and have proven popular with entrepreneurs across a multitude of industries. This is due to the fact that this business type does not require any form of registration with the state authorities.
Advantages of a Sole Proprietorship
Inexpensive to establish: The only filing fees that are incurred are when the name of the business is being registered or when acquiring the necessary permits and licenses.
You can hire as many people as you wish: Due to the fact that there are no restrictions on the number of people that you can employ, you are able to grow your team as the business grows without having to change to a formal incorporation.
You are completely in charge: Sole Proprietorships give owners complete control over the company; this means that decisions do not have to be made according to the shareholders or legal partners.
Disadvantages of Sole Proprietorship
You take complete personal liability: Since there is no legal distinction between you and your business, you now take sole responsibility for all debts of the company. This means that in a legal dispute with your business, a judge can rule that your personal assets and funds can be used to pay for any damages.
Raising investment capital can be difficult: It is basically next to impossible to sell ownership when it comes to sole proprietorships.
No business write-offs: You will not be able to lower your taxable income; in order to deduct the costs of running your business, you are required to keep strict records to prove that costs are ordinary as well as necessary.
Incorporation Guru has some great resources if you would like to read more on Sole Proprietorships.
A close corporation is generally smaller than other corps and is entitled to run without strict formalities. Popular amongst small businesses, the entity is run by shareholders and directors. Close corporations are elected at a state level and are required to operate under the state laws that apply to them.
Advantages of a Close Corporation
Fewer formalities: Closed Corporations are required to abide by state-specific rules; however, these are substantially less strict than with other corporations such as S and C Corps.
Stronger Liability protection: Due to the lack of formalities, Close corporations have less to be liable for as there is added leeway, and errors are more forgivable.
Stakeholders have more control: An advantage for shareholders is that they have a significant degree of control over how shares are procured by those outside the business.
Disadvantages of a Closed Corporation
Double taxation: This is a problem faced by most corporations, in that the business has its income taxed at both entity and shareholder level.
Expensive to form and operate: A closed corporation will require a lot of startup capital; this is in addition to the filing charges and higher taxation. The cost factor is one of the entity’s biggest downfalls for new businesses.
The application process is lengthy: The filing of articles with the secretary of state might be quick. However, the entire process is lengthy. You will be required to sort out your drafts and keep up with corporate bylaws, issue stock certificates as well as take minutes for meetings.
The business structure that you choose will ultimately decide how much tax you will pay, your business’s capacity to raise funds, the paperwork that you will be required to file as well as your personal liability. You are required to decide on your business structure before you even go about the registration process.
It is always recommended to seek help from a professional to ensure that you make the right choice.