Sole Proprietorship

A business owned by one person, who is entitled to all of its profits and responsible for all of its debts, is
considered a sole proprietorship. These firms are owned by one person, usually the individual who has dayto-day
responsibility for running the business. Sole proprietors own all the assets of the business and the profits generated by it.
They also assume complete responsibility for any of its liabilities or debts.

This legal form is the simplest, providing maximum control and minimum government interference. Currently
used by more than 75 percent of all businesses, it is often the suggested way for a new business that does not carry great
personal liability threats. The owner simply needs to secure the necessary licenses, tax identification numbers, and
certifications in his or her name, and you are now in business! The main advantages that differentiate the sole
proprietorship from the other legal forms are (1) the ease with which it can be started, (2) the owner's freedom to make
decisions, and (3) the distribution of profits (owner takes all).

Still, the sole proprietorship is not without disadvantages, the most serious of which is its unlimited liability. As a
sole proprietor, you are responsible for all business debts. Should these exceed the assets of your business, your
creditors can claim your personal assets--home, automobile, savings account, and investments. In other words, the law
basically treats the business and the owner as one and the same. This uniform treatment also has important tax
implications. Partnerships and corporations may lessen their tax liability through a myriad of business expenses and
other tax avoidance techniques. These tax deductions may not be applicable to a sole proprietorship. Also, the potential
growth and reach of a sole proprietorship pale in comparison with that of a corporation. Sole proprietorships also tend
to have more difficulty obtaining capital and holding on to key employees. This stems from the fact that sole
proprietorships generally have fewer resources and offer less opportunity for job advancement. Thus, anyone who
chooses the sole proprietorship should be prepared to be a generalist, performing a variety of functions, from accounting
to advertising.

Advantages

 You're the boss.

Partnership
A business owned by two or more people, who agree to share in its profits, is considered a partnership. Like sole
proprietorships, the laws do not distinguish between the business and its owners. The Partners should have a legal
agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future
partners will be admitted to the partnership, how partners can be bought out, or what steps will be taken to dissolve the
partnership when needed. It’s difficult to think about a "break-up" when the business is just getting started, but many
partnerships split up at crisis times and unless there is a defined process, there will be problems. They also must decide
up front how much time and capital each will contribute. Like the sole proprietorship, it is easy to start and the red tape
involved is usually minimal. The tax structure is the same as proprietorship except in the profits and losses of the
partnership are divided by an agreed percentage by the partners.
 The main advantages of the partnership form are that the business can (1) draw on the skills and abilities of each
partner, (2) offer employees the opportunity to become partners, and (3) utilize the partners' combined financial
resources.
However, for your own protection, it is advisable to have a written partnership agreement that will spell out the
specifics of the agreement. This should state (1) each partner's rights and responsibilities, (2) the amount of capital each
partner is investing in the business, (3) the distribution of profits, (4) what happens if a partner joins or leaves the
business, and (5) how the assets are to be divided if the business is discontinued. Things have a way of changing and
people forgetting over time, so it is essential that there be a signed document that all abide by.
Partnerships also have their share of disadvantages. The unlimited liability that applies to sole proprietorships is
even worse for partnerships. As a partner, you are responsible not only for your own business debts, but for those of
your partners as well. Should they incur debts or legal judgments against the business, you could be held legally
responsible for them. Disputes among partners can be a problem, too. Unless you and your partners see eye to eye on
how the business should be run and what it should accomplish, you are in for trouble.
However, a partnership is generally the least advisable way to go. It requires filing a separate partnership tax
return, does not carry liability protection for general partners, and can lead into legal and personal disputes. A corporate
form of ownership is generally recognized as preferable over partnership, because it can serve the same purpose while
offering a cleaner and better protected structure for the owners.

Advantages
 Two heads are better than one.
 It's easy to get started.
 More investment capital is available.
 Partners pay only personal income tax.
 High-caliber employees can be made partners.
Disadvantages
 Partners have unlimited liability
 Partners must share all profits
 The partners may disagree
 The life of the business is limited

Corporation
A corporation differs from the other legal forms of business in that the law regards it as an artificial being
possessing the same rights and responsibilities as a person. This means that, unlike sole proprietorships or partnerships,
it has an existence separate from its owners. It has all the legal rights of an individual in regards to conducting
commercial activity -- it can sue, be sued, own property, sell property, and sell the rights of ownership in the form of
exchanging stock for money. A corporation can be taxed; it can be sued; it can enter into contractual agreements. The
owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies
and decisions. The corporation has a life of its own and does not dissolve when ownership changes.
A corporation is a juridical entity. It must be created by or composed of at least 2 natural persons, technically
called “incorporators.” Juridical persons, like other corporations or partnerships, cannot be incorporators, although they
may subsequently purchase shares and become corporate shareholders/stockholders. The liability of the shareholders of
a corporation is limited to the amount of their capital contribution. In other words, personal assets of stockholders
cannot generally be attached to satisfy the corporation’s liabilities, although the responsible members may be held
personally liable in certain cases. For instance, the incorporators may be held liable when the doctrine of piercing the
corporate veil is applied. The responsible officers may also be held solitarily liable with the corporation in certain labor
cases, particularly in cases of illegal dismissal.

As a result, the corporation offers some unique advantages. These include (1) limited liability: owners are not
personally responsible for the debts of the business, (2) the ability to raise capital by selling shares of stock, and (3) easy
transfer of ownership from one individual to another. Plus, unlike the sole proprietorship and partnership, the
corporation has "unlimited life" and thus the potential to outlive its original owners

Advantages
 Stockholders have limited liability
 Corporations can raise the most investment capital
 Corporations have unlimited life
 Ownership is easily transferable
 Corporations utilize specialists.