Forms of Business Organization

Forms of Business Organization

• Three major forms
– Sole proprietorship
– Partnership
• General
• Limited
– Corporation
• Limited liability company

Sole Proprietorship

• Advantages
– Easiest to start
– Least regulated
– Single owner keeps all the profits
– Taxed once as personal income
• Disadvantages
– Limited to life of owner
– Equity capital limited to owner’s personal wealth
– Unlimited liability
– Difficult to sell ownership interest

Partnership

• Two or more owners (partners)
– General partnership: all partners share in gains and losses and all have unlimited liability
for all partnership debts
– Limited partnership: one or more general partners will run the business and have unlimited
liability but there will be one or more limited partners who do not actively participate in
the business and their liability is limited to their contribution.

• Advantages
– Two or more owners
– More capital available
– Relatively easy to start
– Income taxed once as personal income
• Disadvantages
– Unlimited liability
• General partnership
• Limited partnership
– Partnership dissolves when one partner dies or wishes to sell
– Difficult to transfer ownership
• Two or more owners (partners)
– General partnership: all partners share in gains and losses and all have unlimited liability
for all partnership debts
– Limited partnership: one or more general partners will run the business and have unlimited
liability but there will be one or more limited partners who do not actively participate in
the business and their liability is limited to their contribution.
• Advantages
– Two or more owners
– More capital available
– Relatively easy to start
– Income taxed once as personal income
• Disadvantages
– Unlimited liability
• General partnership
• Limited partnership
– Partnership dissolves when one partner dies or wishes to sell
– Difficult to transfer ownership

Corporation

• A business created as a distinct legal entity owned by one or more individuals or entities.
• Forming of corporation involves preparing
– Charter including corporation’s name, intended life, business purpose and number of
shares
– Set of bylaws which describes the regulations for the business

Separation of Ownership and Control
Corporation

• Advantages
– Limited liability
– Unlimited life
– Separation of ownership and management
– Transfer of ownership is easy
– Easier to raise capital
• Disadvantages
– Separation of ownership and management
– Double taxation (income taxed at the corporate rate and then dividends taxed at personal
rate)