Generally, businesses are legally organized in one of three forms:
Sole Proprietorship
This is a business owned and operated by a single individual.
- The law makes no distinction between the individual and the business, so the individual assumes unlimited liability.
- The individual owner may face challenges in raising capital.
- Ownership of the sole proprietorship is transferred only by the full sale of the business.
Partnership
This is a business owned by multiple individuals.
- The owners of a partnership share in the unlimited legal liability risk.
- The ownership of a partnership cannot be transferred.
- Typically, the partners will use mutually agreed legal contracts to manage conflicts of interest among themselves.
- A partnership may be able to more easily raise capital than a sole proprietorship, but not as easily as a corporation.
Corporation
This business is chartered by the laws of a government body. The corporation, unlike the sole proprietorship or partnership, is a legally distinct entity from its owners.
- The corporation can quickly raise debt or equity capital.
- The corporation’s owners do not need any specific expertise to participate in the corporation.
- Ownership in a corporation can easily be transferred.
- Stock owners have only a limited legal liability (i.e., the worst case scenario is that the value of their shares drop to $0).
- Corporations are more heavily regulated than sole proprietorships or partnerships.
- Equity owners also face greater difficulty in overseeing the business operations of a corporation.
- Corporations also face more conflicts of interest than the other business organization structures.
