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Sole
proprietorship, partnership and corporation are the three
different legal forms of business organization.
Sole
Proprietorship
This
type of business is owned by only one individual. It is the most popular form of business and many
partnerships and corporations that exist today, once started
out as sole proprietorships.
Advantages
of Sole Proprietorship:
-
It
is the least regulated form of business and is therefore
easy to start and administer.
-
The
owner is allowed to keep all the profit. All funds generated
from the business belong to the owner and are therefore
added to his personal wealth.
Disadvantages
of Sole Proprietorship:
-
The
business is not separate from the owner, thus, the owner
has unlimited liability for business debts. The owners' personal assets can be used, as payment
to creditors and the owners will be solely responsible
for lawsuits brought against the business.
-
The
life span of the business is limited to that of the
owner. The transfer of ownership may be difficult, as
this process requires the sale of the business to a
new owner.
-
The
capital raised to start the business is usually limited
to the owner's personal wealth and the business might
forgo new opportunities because of lack of sufficient
funds.
Partnership
A
partnership is a business that is owned by two or more individuals.
There are two types of partnership: general and limited
partnership. The
difference between both types of partnership is that in
the general partnership, all partners have unlimited liability
for all debts and share in gains and losses, while in the
limited partnership, there are both general and limited
partners. The
latter will not actively participate in the business and
is only liable for the amount contributed to the business.
Advantages of Partnerships:
-
Partnerships
are relatively easy and affordable to form
-
In
the case of a limited partner, his/her vested interest
can be sold without terminating the business.
Disadvantages
of Partnerships:
-
The
owners have unlimited liability for business debts.
-
The
partnership is dissolved when one partner dies or decides
to sell his portion.
-
Transfer
of ownership requires the formation of a new partnership.
-
All
income is taxed as personal income to the owners.
-
The capital raised is usually dependent on the combined
wealth of all partners.
Corporation
A
Corporation is a separate legal entity that is formed by
one or more individuals. In a corporation there is a distinct separation between
ownership and management. Corporations are able to own and operate businesses,
borrow money, sue and be sued and enter into contracts.
However, a corporation lacks the physical capabilities
of managing its own affairs. Therefore, the owners (shareholders),
elect a board of directors to oversee the corporation's
activities.
Advantages of a Corporation:
-
Shareholders
can transfer stocks readily and easily.
-
The
life span of the corporation is unlimited.
-
The
owners have limited liability for business debts. The
most they can loose is the amount of money they invested.
-
The
corporation can easily raise funds by selling new shares.
-
The
corporation will protect its owners and will assume
the responsibility should a lawsuit be brought against
the company.
-
The owners of the corporation can hire themselves as
employees (officers) and can therefore take advantage
of employee benefits such as medical and dental insurance
and retirement plans.
Disadvantages of a Corporation:
-
It
is the most complicated form of business to start.
-
Corporate
taxes are subject to double taxation, i.e., when the
corporation earns profit and pays out dividends to shareholders.
(With Exception of the S Corp)
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