The sole proprietorship is the simplest form of business organization. A sole proprietorship is a business that is owned by an individual who is solely responsible for all aspects of the business. The owner is personally responsible for all debts of the business, even in excess of the amount invested. The business and its owner are thus considered the same entity.
The advantages of a sole proprietorship include: a. Low start up costs, as legal and filing fees are at a minimum. However, many states and cities require a filing with county clerk. b. Greatest freedom from regulation and paperwork. c. Owner is in direct control, with no interference from other owners. d. Taxes may be lower than for regular corporations.
The disadvantages of a sole proprietorship include: a. Unlimited liability. The proprietor is responsible for full amount of business debts no matter how incurred, which means that his personal property may be taken to cover debts of the business. This of course is a significant disadvantage. b. Unstable business life, since the sole owner’s death would terminate the business. c. Difficulty in raising capital and in obtaining long-term financing, because an ownership interest in the business cannot readily be sold.
A partnership is a legal entity that is jointly owned by two or more individuals. As with a sole proprietorship, the owners are personally liable for all debts of the firm unless a special type of partnership, the limited partnership is set up. Limited partnerships are complex legal structures, and one partner must retain unlimited liability for the debts of the firm. Even partnership agreements for regular partner ships can be quite complex.
The advantages of a partnership include: a. Low start up costs, usually with fewer filing fees and franchise taxes. b. A broader management base than a sole proprietorship, and a more flexible management structure than a corporation. c. Possible tax advantages, since it avoids the double taxation of corporations and because income can be taxed at personal income rates. Naturally, the personal income situations of partners could make this a disadvantage. d. The potential for additional sources of capital and leverage by adding limited and special partners. e. The duration of the entity can be limited to a stated time, or can continue indefinitely by amendment.
The disadvantages of a partnership include: a. Unlimited liability of at least one partner and possibly all partners, except in limited partnership debts. b. The life of a partnership is unstable, since changing partners by adding new ones or by death or departure of partners causes the partnership tp terminate. c. Obtaining large sums of capital is relatively difficult, as financing cannot be obtained from the public through a stock offering. d. The acts of just one partner, even unauthorized acts in many cases, bind all partners. e. An individual partnership interest cannot be sold or transferred easily. f. Most tax supported fringe benefits, such as pension and profit sharing arrangements available to corporations, are unavailable to partnerships.
A corporation is a business that is formed and authorized by law to act as single entity, although it may be owned by one or more persons. It is legally endowed with rights and responsibilities and has a life of its own independent of the owners and operators. It has been defined by the United States Supreme Court as “an artificial being, invisible, intangible, and existing only in contemplation of the law.” To fully understand the concept you must think of it as a distinct independent entity and one separate from it’s owners.
The advantages of a corporation include: a. Limited liability. The owners are not personally liable for debts and obligations of corporation. They can personally lose only the extent of their investment in the corporation, with the exception that they can be personally liable in certain types of taxes, such as payroll taxes withheld from the employees’ paychecks but not paid to the IRS and state tax authorities. If the business fails or loses a lawsuit, the general creditors cannot attach the owners’ homes, cars and other personal property. Limited liability is the one major reason so many businesses are incorporated. b.
Capital can be raised more easily than under other forms of ownership. This does not mean, however, that a new corporation can sell shares of stock easily. The sale of stock is highly regulated by both federal and state governments, and obtaining bank loans for a new business may be no easier for a new corporation than for a partnership or proprietorship. c. Ownership in a corporation is more easily transferable, this includes transferring shares to family members as gifts or otherwise, as well as selling your interest to some other person. However, in many small corporations it is advisable to put restrictions on transfer of shares, especially if the persons owning and working in the business must be able to work closely together.
This is generally accomplished by stockholder agreements. The stockholder’s agreement is an agreement between a shareholder and the corporation. It may state, that the shareholder may not sell his shares for a specific period of time after acquiring them or that the shareholder must, under certain conditions, sell the shares back to the corporation. d. Since the corporation is an independent legal entity, it has a life of its own, or a continuous existence. It does not cease simply because one of the owners dies or wishes to retire. e. A corporation has a defined centralized management. Control rests in the board of directors, whose powers are exercised through the officers. f. Many companies offer discounts to corporations.
g. Retirement funds, defined contribution plans, money purchase plans and other profit sharing, pension and stock option plans may be mor easily set up with a corporation.
The disadvantages of a corporation include: a. Corporations are subject to more government regulations than either partnership or sole proprietorships. b. Corporations are among the most expensive form of business to organize, although partnership may be equally expensive. c. There is double taxation, since both the corporate entity and the individual owner have to file tax returns. d. Record keeping requirements may be more extensive with a corporation. e. Operating across state lines can be complicated because corporations need to qualify to do business in states where they are not incorporated. f. Ending the corporate existence, and in many cases even changing the structure of the organization, can be more complicated, and costly than partnerships and proprietorships.