Forms of Business Organizations

Sole proprietorship: A sole proprietorship is a business owned by one person. The owner may operate on his or her own or may employ others. The owner of the business has total and unlimited personal liability of the debts incurred by the business. • Partnership: A partnership is a form of business in which two or more people operate for the common goal of making profit. Each partner has total and unlimited personal liability of the debts incurred by the partnership. There are three typical classifications of partnerships: general partnerships, limited partnerships, and limited liability partnerships.

• Corporation: A business corporation is a for-profit, limited liability entity that has a separate legal personality from its members. A corporation is owned by multiple shareholders and is overseen by a board of directors, which hires the business’s managerial staff. • Cooperative: Often referred to as a “co-op business” or “co-op”, a cooperative is a for-profit, limited liability entity that differs from a corporation in that it has members, as opposed to shareholders, who share decision-making authority. Cooperatives are typically classified as either consumer cooperatives or worker cooperatives. Cooperatives are fundamental to the ideology of economic democracy.

The three main categories of business organization are the sole proprietorship, the partnership and the limited liability forms. Among the latter two of these, several different forms exist. Other possibilities include the unincorporated association and the nonprofit corporation.

1. Sole Proprietorships

o A sole proprietorship is a one-man business. The owner is liable for all of the company’s debts. Furthermore, the company’s income is considered to be the owner’s personal income and must be reported on theowner’s individual income tax return. The advantage of this form of business organization is simplicity–no partnership agreements need to be signed, there are no corporate registration formalities to perform, and there is no need for corporate formalities, such as shareholder’s meetings. General Partnerships

o In a general partnership, the business is owned by two or more general partners. Each of the partners is liable for the debts of the business. Although the partnership must file a separate tax return, each general partner is required to report his pro rata share of the partnership’s income on his individual income tax return. A partnership agreement is a practical necessity for this form of business organization. Limited Partnerships

o In a limited partnership, there is at least one general partner (with unlimited liability) and at least one limited partner. The limited partner’s liability for the debts of the partnership is limited to the amount that he contributed to the partnership. As with a general partnership, a limited partnership should file a separate tax return. Limited partners are entitled to a certain return on their investment but generally have no management authority and need to report only the partnership’s income on their individual income tax returns. Corporations

o A corporation is a limited liability entity that is treated as a separate legal person for tax purposes. It must file its own tax return and is taxed separately from the shareholders. The shareholders of a C corporation are liable for the corporation’s debts only to the extent of their contribution to the corporation. Shareholders need not report the corporation’s income on their individual income tax returns–only income they receive from the corporation.

In the United States, a corporation must be registered with the state of its incorporation. Corporations may sell shares to the public if extensive public offering requirements are met. An ordinary corporation may become an S corporation if certain IRS requirements are met (see References) at which point it is no longer taxed separately.Limited Liability Companies (LLCs)

o LLCs combine the advantages of limited liability that corporations possess with the flexibility and relative lack of formality that partnerships possess. Members must report the LLC’s income on their individual income tax returns in much the same way as general partners do. LLCs are not required to file their own tax returns but must file certain informational returns with their home state. LLCs may not sell shares to the public.

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Differences Between Sole Proprietorship, Partnership & Corporation

By Evan Mckinney, eHow Contributor

• Print this articleRelated Searches:• Benefit HR Outsourcing• Payroll SystemThere are a number of different types of business organizations an individual or a group can form. However, three of the most common types of business organizations are sole proprietorships, partnerships and corporations. These three types of businesses are similar in some ways, but a number of differences are important to note.


o A sole proprietorship or a partnership may be formed without filing any formal paperwork. The creators of a corporation, however, mustfile a document known as the articles of incorporation.


o The owner(s) of a sole proprietorship or a partnership may be held liable for any business activity and/or obligation. Corporate shareholders, however, usually are liable only for the amount they invested.

Record Keeping

o Corporations are required to keep strict records of meetings and other similar administrative activities, while a sole proprietorship or a partnership typically is not required to do so.


o A sole proprietorship can have only a single owner, but a partnership or a corporation may have any number of owners.


o The owner of a sole proprietorship is required only to report the business’ earnings on her tax return, while a corporation or a partnership must file a separate return for the business.

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What Are the Steps in Starting a Service Business as a Sole Proprietorship?

When you start up a new business, you have an option of how you want to structure the company. You may choose between sole proprietorship, partnership, corporation and limited liability company. Of these options, sole proprietorship is the simplest. You can have employees under this structure, but a sole proprietorship means that there is only one owner (you). To start a service-oriented sole proprietorship, you must follow outlined steps that adhere to local, state and federal regulations. Difficulty:



Things You’ll Need

• Identification documents for registration of business 1.o 1Choose your formal business name. You may choose to use your regular name as your business name. A business name different than your own, however, is easier to trademark and gives you the opportunity to describe the business through the company title. o 2

Decide on a domain name for your business website. See if the domain is available for use through Internet providers. Even though you will be a small business as a sole proprietor, you still should have a website. Having a website increases your ability to market yourself and helps you appear just as professional and competitive as larger businesses in your niche. A website also is a great way to give clients a platform for feedback and inquiries. The domain name should be as close to your business name as possible, so it’s easy for customers to remember. o 3

Contact your state’s business registration authority to check the availability of your selected business and domain name for registration. If your domain name still is available through website hosts, it probably has not been registered with the registration authority. However, some people will register a name with the registration authority before they actually set up the domain name with a host, so you have to check. o 4

File your business and domain names with the business registration authority. Usually this just involves filling out a basic form and paying a nominal fee. After you do this, you’ll need to publish the registration in a local newspaper and submit an affidavit to the registration authority verifying publication. o 5

Apply for any licenses you need to do business under your assumed business name. For example, you may need to get a local business license. The licenses you will need will depend on where you conduct business and the services you provide. o 6

Apply for an Employee Identification Number, also known as a tax ID, if you will have employees. You can do this for free through the Internal Revenue Service website. Having employees also requires you to register with your state’s department of labor. o 7

Prepare your business plan. The business plan outlines exactly what services you will provide and how you will provide them. It will describe how the business will be financed, your business budget, your qualifications and basic operational guidelines. o 8

Use your business plan to market your business to lenders, investors and grant organizations. This will give you much of the start-up capital you need to finish opening your business. o 9

Obtain the necessary physical resources to open the proprietorship such as office supplies or a rented business office. Advertise that you are hiring employees and conduct interviews for hire, if applicable. • Business Short

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The Differences Between a Sole Trader & a Sole Proprietorship

There is no legal difference between a sole proprietor and a sole trader. The two terms are interchangeable. A sole proprietor is someone who operates an unincorporated business without a partner. A sole proprietorship can be any type of business but is usually conducive to freelance workers, hair stylists, plumbers and other businesses where people work for themselves. 1. Setting Up Shop

o There is no business arrangement more simple to set up than a sole trader business. In order to become a sole trader, all you have to do is begin work. For example, if you wish to start a sole trader hair salon, all you have to do is cut someone’s hair and charge them for it. This is quite a bit different than filing for incorporation or negotiating a partnership deal — both of which likely require the use of a lawyer and can be complicated and expensive. Sole Trader Advantages

o Sole trader businesses have two distinct tax advantages. Unlike a corporation, sole traders avoid any kind of double taxation. If you incorporate your business, you have to pay taxes on personal income as well as corporate profits. As a sole trader, your business and your personal income are treated as the same thing and taxed only once. In addition, as a sole trader, you can deduct your business expenses, which can decrease your taxable income. This is true even if you have income from other sources, such as investments. Sole Trader Disadvantages

o The biggest disadvantage to setting up your business as a sole proprietorship is you have no wall of protection against your business liabilities. A corporation is treated as a separate entity, but if you are a sole proprietor and your business goes bankrupt or is sued, the courts can attach your personal assets to your creditor’s claims against the business. In addition, while you avoid double taxation, you may find that your overall tax burden is higher than it would be if you were to incorporate. Check with an accountant to be sure. Reducing Liabilities

o There are several ways to reduce the liabilities faced by a sole proprietor. You will need to check with your lawyer, but in most states you can place the title of your house in your spouse’s name, which can shelter your house from creditors. You can also request that your customers sign a release form, which says they will not hold you liable for any damages caused by your negligence. Finally, you can buy liability insurance to protect you from loss if you are sued and pay for any damages you may cause in the course of your work. • Business Short

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Difference Between Partnership & Sole Proprietorship

Sole proprietorship and partnership are terms frequently used in business. When it comes to taxes, responsibilities and the number of individuals involved, there are several differences between the two. 1. Sole Proprietorship

o The definition of a sole proprietorship is “a business structure in which an individual and his/her company are considered a single entity for tax and liability purposes.” Partnership

o The definition of a partnership is “a type of unincorporated business organization in which multiple individuals, called general partners, manage the business and are equally liable for its debts.” Taxes

o A sole proprietorship is not registered with the state as a corporation, which means the owner does not pay income tax separately for the company, but the individual must report business income or losses on their individual income tax return. A partnership, on the other hand, may bring in other investors who do not play a part in the management of the company. However, each member of the partnership shares equal responsibility for profits and losses, as well as debts and liabilities. Responsibility

o The major difference between a sole proprietorship and partnership is merely the number of people involved in the investment or business. Only one individual takes responsibility in a sole proprietorship, while two or more run a partnership. Pros and Cons

o Both types of business have pros and cons. Partnerships allow you to raise the money for the investment easier (since more people contribute), however it’s much easier to manage day-to-day, since you have more than one voice. A sole proprietorship allows you to make all of the business decisions, however you also carry all of the responsibility. • PayPal

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Definition of Sole Proprietorship Partnership

Most people know sole proprietorship and a partnership to be two separate business descriptions. However, another description has arisen–the sole partnership. It is essentially a fancy way of saying sole proprietorship. 1. Benefits

o A sole partnership has the benefit of being simpler than a partnership. There is also one owner to contend with in a sole partnership. This owner runs the business on his own behalf. Disadvantages

o Like a sole proprietor, the business owner in a sole partnership takes the burden of the business debt and taxes upon himself. The partnership allows two or more people to split the liability. Limited partners only share some of the liability and are more similar to a corporation in description. Misconceptions

o It is believed that the sole partnership simply makes it easier to add a partner later, than would a sole proprietorship. This is untrue. States do not recognize sole partnerships as such. They are classified as sole proprietors. Thus the transition from sole partner to partner is no different than sole proprietor to partner. Considerations

o Unless it is in keeping with industry standard in your line of business, it is wise to call your business a sole proprietorship, not a sole partnership. This will help curtail the confusion among those not “hip” to the modern business lingo. Warning

o The Internal Revenue Service does not recognize sole partnerships. Moreover, when filing taxes for your business, file the sole partnership as a sole proprietorship or you will penalized. • Business Short

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