Types of Business Organizations

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.