Introduction
Sole proprietorship, partnership, and corporation are the three of the four main forms of business organizations. One is required to understand first all the features of these business organizations before establishing one. Regarding the ease of formation, the sole proprietorship and partnership business organizations are easier to form than a corporation. The management of these two forms of business is also easier than the management of a corporation. Consequently, the present paper delves into the characteristics, benefits, and drawbacks of each of these business organizations.
Sole Proprietorship
A sole proprietorship is essentially a form of business organization, which is typically owned, controlled, and managed by one individual. For this reason, the management as well as control of this form of business is the duty of its owner. A sole proprietorship business organization is not a separate legal entity from its owner (Cole 2). There are several features that describe a sole proprietorship. First of all, this form of business organization has privacy as it is only the owner who makes all the decisions. In other words, the sole proprietor keeps all the secrets of his/her business to himself. He/she has the full freedom to make the decisions and take any necessary action (Pride, Hughes, and Kapoor 108).
As the sole owner of a sole proprietorship business, a sole trader is the only one who provides the required capital. Nonetheless, he/she can borrow additional capital that the business requires from families and friends or banks. Also, the continuity of this form of business is essentially based on the life or good health of its owner. Additionally, the sole proprietor is the only beneficiary of the profits that the business makes. He/she also suffers all the losses that the business incurs. Furthermore, the Government authorities do not interfere with the operation of a sole proprietorship business. Nonetheless, a sole proprietorship business must adhere to the government rules and laws. For instance, it must not engage in the illegal activities.
Besides, one can start a sole proprietorship business without completing many lawful formalities. No filings are required to start a sole proprietorship (Thompson, Polk, and Hayenga n.p). In other words, a prospective owner does not need to file any special forms with the federal, state, or local agencies to establish this form of business organization. Moreover, a sole proprietor is responsible for all the business liabilities. In other words, the owner of a sole proprietorship business is fully responsible for all the obligations and debts associated with the business. He/she may be required to sell his/her properties to meet the business liabilities when the assets are not enough. It is also easy to close a sole proprietorship business since there are no many legal formalities involved during its formation. The majority of business organizations started are usually the sole proprietorship businesses.
Advantages of a Sole Proprietorship
A sole proprietorship form of business is easier to start than a corporation. The sole proprietor only needs to acquire the necessary capital and obtain an operating license and permit. A sole proprietorship business also enjoys particular tax advantages. In essence, this form of business is not double taxed (Pride, Hughes, and Kapoor 108). The process of decision making in a sole proprietorship business is also simpler compared to the other forms of business organization. Additionally, this form of business is flexible. As a result, a sole proprietor can change the business policies, according to the market demand and conditions without difficulty. What is more, there is high secrecy in a sole proprietorship business since it is only the owner who manages it.
Disadvantages of a Sole Proprietorship
One of the shortcomings of a sole proprietorship business organization is the unlimited liability. The properties of the owner can be sold to repay the business debts. Besides, the sources of finances for this form of business are limited. Consequently, it may be difficult for the sole proprietor to expand the business. The sole proprietor also bears all the business risks. There is no sharing of risks in a proprietorship business like in a partnership business. Moreover, a sole proprietorship form of business organization suffers from the lack of continuity. The death of a sole proprietor might lead to permanent closure of the business.
Partnership
The partnership is essentially the type of business organization owned by two or more individuals. Ideally, two or more people agree to combine their managerial abilities as well as financial resources to start this form of business. Unlike in a sole proprietorship business organization, the individuals wishing to start a partnership form of business organization usually prepare a legal contract called a partnership agreement. In particular, this contract describes the partnership terms as well as the way the partners are going to make decisions, share the profits, resolve the disputes, admit additional partners, or dissolve the business. The partners are required to seek the assistance of an attorney when preparing a partnership agreement (Blair, Marcum, and Fry 31). As a matter of fact, this agreement ensures that the partners have cooperatively created the partnership terms and are going to protect their interests.
Just like a sole proprietorship form of business organization, a partnership is also not a distinct legal entity from the owners. In other words, this form of business organization is not differentiated from its owners by the law. The least number of persons required to form a partnership is two while the maximum number is twenty. The companies act requires a partnership that has over twenty partners to incorporate as a company. The partners in a partnership form of business organization have unlimited liability (Blair, Marcum, and Fry 26). They are not required to own property in the name of their business. Besides, the partners can take a legal action or be sued in the name of the business. Additionally, the partners are individually liable for the business losses and debts incurred by their fellow partners. The partners are also required to have utmost good faith in one another. The majority of the partnership businesses have collapsed because of the failure of the partners to have utmost good faith in one another. Consequently, the partners ought to be truthful and impartial for their business to last longer and accomplish its objectives and goals.
Just like in sole proprietorship, forming a partnership is easy as there are no many legal formalities. A partnership form of business organization can be closed by either the registrar or its owners. In particular, a registrar closes a partnership when the partners fail to renew its registration. On the other hand, the partners or their authorized representatives close the partnership by filling a cessation business notice. There are two types of partnership business organization. These include the general partnership and limited partnership.
The partners in a general partnership remain lawfully and individually liable for the debts incurred by their business. Besides, these partners participate in the management of their business and share the losses incurred or profits made by the business. Nonetheless, in a limited partnership, there are some partners who are not involved in the management of the business. These partners only contribute finances. Consequently, a limited partnership has one or more than one general partners who are involved in the management of the business. It also has one or more than one limited partners (Thompson, Polk, and Hayenga n.p). The profits that these partners get or the losses that they incur depend on the amount of the finances they have contributed to the business.
Advantages of a Partnership
It is easy to establish a partnership (Pride, Hughes, and Kapoor 112). It is simple to establish this form of business just like it is to start a sole proprietorship business. The legal requirements for a partnership business are not numerous. The partners are required to invest enough time in developing the partnership agreement to prevent the business from collapsing. The partnership business also benefits a great deal from the partners who possess complementary skills. Unlike in a sole proprietorship, there is more capital available to partnership business (Cole 3). A sole proprietor is the only financier of his/her business. The partnership is advantageous because there is more than one individual who contribute the required finances. The partners also share the losses that the business makes according to their agreed profit-sharing ratio. The partnership business is also flexible just like a sole proprietorship business.
Disadvantages of a partnership
Despite these benefits, a partnership business organization has some disadvantages. One of these disadvantages is the lack of continuity. The death or withdrawal of one partner results in the closure of a partnership business. Besides, the liability of the partners in this form of business is limited, implying that the partners’ properties may be sold to repay the business debts just as it is the case with sole proprietors. Furthermore, the disagreements among the partners might bring problems to the business.
Corporation
A corporation is a kind of business organization, which is distinct and separate from its owners. It has certain liabilities, privileges, and rights outside those of a person. Ideally, as a distinct form of business organization from its owners, a corporation can own property, enter into contracts, be sued and sue, be taxed and borrow capital. Unlike in the case of a sole proprietorship and partnership, the owners of a corporation are not solely accountable for the obligations or debts that their business incur. All the owners enjoy limited liability (Cole 3). Besides, a corporation is more complicated than the sole proprietorship and partnership business organizations. As a matter of fact, the record keeping, tax, paperwork, and accounting requirements make the management of a corporation complicated. A corporation is taxed on its income because it is a separate legal entity (Blair, Marcum, and Fry 28).The corporation owners are called bondholders, shareholders, or stockholders. As a minimum, a corporation must have one shareholder. Nonetheless, there are a number of states, which require a corporation to have two or more stockholders.
The stockholders' liability is limited to the value of the investments they make in the corporation. Consequently, a corporation protects its shareholders by taking the liability for the obligations or debts it incurs. It is vital to note that a corporation owns and runs the business in the best interests of its stockholders, under their total control. Starting a corporation is more complicated than starting a partnership or sole proprietorship business. The prospective stockholders also called the incorporators are required to seek the assistance of an attorney when starting a corporation. In particular, the attorney helps them file the Articles of Incorporation. Ideally, the Articles of Incorporation provide the information about the name of the corporation, its purpose and projected life, the number of stocks that it will issue, and the people who will manage it, among other information (Pride, Hughes, and Kapoor 117). The incorporators must send the articles of incorporation to the state for review. The corporation starts operating after the state approves its establishment.
A corporation can either be a public corporation or a private corporation. The former is allowed to sell its shares to the members of the public while the latter is not allowed. Thus, a corporation can either be publicly held or privately held. All the corporations are required to have a board of directors. It is the responsibility of the shareholders to elect the members of the board (Pride, Hughes, and Kapoor 118). The responsibility of the board of directors in any corporation involves overseeing its overall business operations. The death of a shareholder, sale of shares, or the employee’s incapability to function does not affect the continuous life of the corporation. Compared to the sole proprietorship and partnership business organizations, it is easier for a corporation to acquire the required capital. As a matter of fact, a corporation has a greater pool of resources than the partnership and sole proprietorship business organizations. A corporation, thus, can acquire an immense amount of capital by selling shares or bonds.
Advantages of a Corporation
One of the advantages of a corporation is that the shareholders are not accountable for the business debts. A corporation is not like a partnership or a sole proprietorship business in which the owners are exclusively liable for the business debts. The personal properties of the shareholders are protected by a corporation (Blair, Marcum, and Fry 27). Besides, a corporation can raise more finances through selling the shares than a partnership and a sole proprietor (Pride, Hughes, and Kapoor 119). The corporation can also acquire the status of S Corporation by meeting particular requirements and reduce its tax obligations. Additionally, the transfer of ownership in a corporation is easy. Ideally, ownership interests can easily be sold to the third parties without affecting the continuous operation of a corporation. The other advantage of a corporation is that it does not cease to operate upon the passing away of its directors or shareholders.
Disadvantages of a Corporation
In spite of the benefits as highlighted above, a corporation has some disadvantages. First of all, starting a corporation needs more money and time compared to starting a sole proprietorship or a partnership business organization. Besides, the government agencies closely regulate a corporation. What is more, the conflicts between the stockholders and the directors are likely to occur.
Conclusion
The two forms of business organizations, sole proprietorship, and partnership, share some similarities. Both forms of business organizations as already explained are easy to set up. Besides, in both partnership and sole proprietorship business organizations, the owners are liable for the business debts. Additionally, both forms of business ownership have a limited life. The death of a sole proprietor or one of the partners results in the dissolution of the sole proprietor and partnership business respectively. One of the differences between the sole proprietorship and partnership is that the former is formed by one person while the latter is formed by two or more individuals. A corporation is different from both a sole proprietorship and partnership form of business. The owners of a corporation are not solely accountable for the debts that their business incur, which is not the case in a partnership and sole proprietorship forms of business. The formation of a corporation is also more complex than the formation of a sole proprietorship and partnership business. Unlike a corporation, the sole proprietorship and partnership business have fewer formalities to comply with and less paperwork.
Works Cited
Blair, Eden S., Tanya M. Marcum, and Fred F. Fry. "The disproportionate costs of forming LLCs vs. Corporations: The impact on small firm liability protection." Journal of Small Business Strategy 20.2 (2009): 23.
Cole, Rebel A. "How do firms choose legal form of organization?" Available at SSRN 1682263 (2011).
Pride, William, Robert Hughes, and Jack Kapoor. Foundations of business. Cengage Learning, 2015.
Thompson, William, Wade Polk, and Wayne A. Hayenga. "E-489, Basic Business Structures: Sole Proprietor, Joint Operating Agreements and Partnerships." Texas AgriLife Extension Service, the Texas A&M System. Disability, religion, age, or national origin. Issued in furtherance of Cooperative Extension Work in Agriculture and Home Economics, Acts of Congress of May. Vol. 8. 1914.
