When business corporations are created, they are all regular “C” corporations. They are incorporated in accordance with the laid down statutes governing corporation formation. The financial statements must also be prepared according to the recognized formats. They possess a distinct legal capacity to do business in their own and own property. The “S” corporation status is selected by members due to the need to offset losses in their “paycheck” income. Later these corporations revert to C corporation status when the corporation begins to make taxable profits.
It is important to remember that being an S corporation is strictly a tax matter that the corporation wants to exploit. All other associations of persons who associate to promote a common and lawful purpose are not legal persons with distinct identities. They have no legal existence of their own and property if any is jointly held or is held by trustees for the benefit of all members. The rights of the members are enshrined in the constitution of the association.
Members are liable for debts and other obligations of the associations and in the event of dissolution, members are entitled to share of whatever remains. As a general rule it can only sue or be sued through its principal officers. The law governing these associations is the law which regulates the activities they engage in. The commonest examples of unincorporated associations are sole proprietorships and partnerships. (Prakash, O. 1998). Sole proprietorships A sole proprietorship is owned by a single person.
This type of business doesn’t have a distinct separate legal personality from its owner even if it operates under a different name which is registered or not from the owner.
All revenue and expenditure are considered to be part and parcel of the owner’s personal tax return. If there is a business loss, the owner will enjoy a deduction to offset personal (paycheck) income. However, if the business makes a profit, the owner is responsible for any taxes due. The legal requirements of sole proprietors are easy to fulfill and comply with.
The financial statements follow no legal format and therefore costs are minimized. The sole proprietor will not enjoy any tax benefits that arise due to the business being a distinct entity in law. The sole proprietor and the business are one and therefore if the business is sued it is the sole proprietor who is sued. The sole proprietor liability due to the business failure to meet its financial obligations is unlimited and the sole proprietor is personally liable for the debts of the business including the disposal of personal assets to meet company financial liabilities.
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