Three common forms of business organizations are sole proprietorship, partnership and corporation. Sole proprietorship is owned and managed by one person. Partnership has more than one investors as partners. The ownership of a corporation is represented by the number of shares stockholders own.
Sole proprietorship is invested and managed by one person. The business operated in the form of sole proprietorship is not legally separated from the owner. The owner is personally responsible for the obligations from business operations. Sole proprietorship is commonly used for small businesses.
Partnerships is owned by more than one investor. In general, partners assume unlimited liability for the obligations of a partnership, with the exception of limited liability partners whose liability is limited. Income from a partnership is taxed when it is distributed to the partners.
Corporation is a legal entity which is separate from the owners. The ownership of a corporation is sold to investors in the form of stock. The voting rights of stockholders are represented by the number of voting stocks of a corporation. Business decisions of a corporation are made by the board of directors and the management. The liability of stockholders is limited to the amount invested in the stock. Limited liability of stockholders makes it possible to raise a large amount of capital.
Advantages of a corporation
Stockholders have limited liability.
It is easier to raise a large amount of capital.
Disadvantages of a corporation
Corporate income is taxed twice. Corporations pay corporate income tax on the income and stockholders who receive dividend from a corporation pay individual income tax on dividend income.