The many important benefits - and also disadvantages - that corporations over partnerships and sole proprietorships.

You are watching: Which of the following is an advantage of corporations over sole proprietorships?


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Corporations enjoy many benefits over partnerships and also sole proprietorships. But there are also disadvantages. Us cover the most vital ones below. Advantages: Stockholders space not liable because that corporate debts. This is the most vital attribute that a corporation. In a sole proprietorship and partnership, the owners space personally responsible because that the debts of the business. If the heritage of the sole proprietorship or cooperation cannot accomplish the debt, creditors have the right to go after every owner"s an individual bank account, house, etc. To comprise the difference. On the other hand, if a corporation runs the end of funds, the owners space usually no liable. Please keep in mind that under details circumstances, an individual stockholder might be liable for corporate debts. This is periodically referred to together "piercing the that company veil." few of these circumstances include:

If a shareholder personally promises a debt. If an individual funds are intermingled v corporate funds. If a corporation stops working to have director and also shareholder meetings. If the corporation has actually minimal capitalization or minimal insurance. If the corporation falls short to pay state counting or otherwise violates state regulation (like defrauding customers).

Self-Employment taxes Savings. earnings from a sole proprietorship room subject come self-employment taxes, i m sorry are at this time a merged 15.3% top top the an initial $97,500 of income for taxes year 2007. Through a corporation, just salaries (and not profits) space subject to such taxes. This have the right to save you countless dollars per year. Because that example, if a sole proprietorship earns $80,000, a 15.3% tax would need to be payment on the entire $80,000. Assume that a corporation also earns $80,000, however $40,000 of that amount is paid in salary, and $40,000 is understood as profit. In this case, the self-employment tax would not be payment on the $40,000 profit. This conserves you end $5,000 per year. Please note, however, that you have to pay you yourself a reasonable salary. Continuous life. The life of a corporation, unlike the of a partnership or sole proprietorship, does no expire upon the death of that is stockholders, director or officers. Easier to raise money. an corporation has actually many opportunities to raise capital. It can sell share of stock, and also it deserve to create new types the stock, together as wanted stock, with various voting or profit characteristics. Plus, investor be assured the they room not personally liable because that corporate debts. Ease that transfer. property interests in a corporation might be marketed to 3rd parties without disturbing the ongoing operation the the business. The company of a sole proprietorship or partnership, on the various other hand, can not be marketed whole; instead, every of that assets, licenses and permits need to be personal transferred, and new bank accounts and tax to know numbers room required. Disadvantages Higher cost. Corporations cost much more to collection up and also run than a single proprietorship or partnership. Because that example, there room the initial development fees, submit fees and also annual state fees. These prices are partially balance out by reduced insurance costs. Formal organization and also corporate formalities.

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A corporation deserve to only be produced by submit legal papers with the state. In addition, a corporation should adhere to technical formalities. These incorporate holding director and shareholder meetings, record minutes, having actually the plank of directors approve major business transactions and also corporate record-keeping. If this formalities are not kept, the shareholder risk losing their personal liability protection. While maintaining corporate formalities is no difficult, it deserve to be time-consuming. On the other hand, a sole proprietorship or partnership have the right to commence and also operate without any formal organizing or operating steps - not even a handwritten agreement. Unemployment tax. A stockholder-employee of a corporation is required to pay joblessness insurance counting on his or her salary, whereas a single proprietor or partner is not. Currently, the commonwealth unemployment taxation is 6.2% that the an initial $7,000 of incomes paid, v a preferably of $434 per employee. If girlfriend pay any type of required state joblessness tax, you deserve to receive an balance out credit of 5.4%, successfully lowering the federal rate to 0.8%, because that a preferably of $56.00 every employee every year.


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