Forms of business organization

Steven Jobs and many other entrepreneurs have organized their companies as corporations. A corporation is one kind of business organization. Other kinds of business organizations are sole proprietorships and partnerships.

Sole proprietorship. A sole proprietorship is a business owned by one person. Sole proprietorships are the most numerous kind of business organization, but most are very small. The reason for their popularity is that they are the easiest and least costly to organize.

There are other advantages. Sole proprietors own all profit of their enterprises, and they are their “own bosses,” free to make whatever changes they please. They have minimal legal restrictions and do not have to pay the special taxes placed on corporations. Sole proprietors also have the opportunity to achieve success and recognition through their individual efforts.

There are also disadvantages. A very serious one is unlimited liability that each proprietor faces. All debts and all problems associated with the business belong to the owner. If a business fails, the owner must personally assume the debts. This could mean the loss of personal property such as automobiles, homes and savings. A second disadvantage of the sole proprietorship is that it has limited capital. The money that a proprietor can raise is limited by the amount of his or her savings and ability to borrow. Also when the owner dies, the business dies. Other disadvantages may include lack of opportunities for employees, limitations of size and growth lack of management resources.

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Partnership. A partnership is a business organization that is owned by two or more persons. Partnerships offer certain advantages over sole proprietorships:

Partners bring additional funds to proprietorship.

Partners can bring fresh ideas and talents to business organizations.

Like the sole proprietorship, partnerships are relatively easy to form and are not subject to special taxation.

Partnerships have the following disadvantages:

In many cases, each of the partners is subject to unlimited liability. Partners are individually responsible for all the debts of the business. In other words, if the business were to fail, its creditors (those to whom money is owed) would have the right to recover their money from any, or all, of the partners.

Any time a partner dies or with draws from the business, the partnership is legally terminated. If the business is to continue, a new partnership agreement must be drawn up.

The amount of capital that a partnership can raise is limited. Exactly what this limit is will depend on the earnings of the business, the wealth of the partners, and their liability to borrow.

Partners may disagree, causing management conflicts that could threaten the firm’s existence.

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Corporation. A corporation is a business organization created under a government charter. Ownership of corporation is represented by shares of stock, and for that reason corporate owners are known as stockholders.

One feature of corporation is that the courts treat it as a legal “person”. It can, for example, sue and be sued and enter into contracts, and it must pay taxes.

Although corporations are outnumbered by about four to one by sole proprietorships, they dominate American business. Corporations are so important because of the advantages they offer over sole proprietorships and partnerships:

Limited liability. Unlike the owners of proprietorships and partnerships, who can be held personally liable for the debts of their firms, the most that corporate shareholders can loose (i.e., their liability) is limited to whatever they paid for their shares of stock. Limited liability is thought to be so important that corporations in most English-speaking countries outside of the United States add the abbreviation “Ltd” (for Limited) to their company name.

Ease of transfer. Stockholders can enter or leave a corporation at will simply by buying or selling shares of stock in that corporation.

Unlimited life. When the corporate stockholders die, their shares of stock are passed on to their heirs. Meanwhile, the corporation is free to conduct business as usual.

Tax advantages. In certain instances individuals can reduce their tax liability by incorporating.

With all these advantages you might wonder why there are so many more unincorporated businesses than incorporated ones. The answer has to do with the disadvantages of the corporation:

It is difficult and expensive to organize a corporation. The process of obtaining a charter usually requires the services of a lawyer. Most small firms prefer to avoid these expenses by forming proprietorships or partnerships.

Corporations are subject to special taxes. The federal government, along with many state and local governments, taxes corporate income in addition to the taxes paid by shareholders on their dividends. (Dividends are the proportion of a corporation’s profits that are distributed to the stockholders.)

Corporations whose stock shares are sold to the public give up their right to privacy. The law requires that these large, open (or public) corporations disclose information about their finances and operations to anyone interested reading about them. The purpose of this legislation is to give people information about companies in which they might invest. But information that helps investors may also be of value to the competition. For that reason, some corporations have chosen to remain closed (or private) corporations rather than disclose information they would prefer to keep secret.

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