Question

Define the three basic business organization structures (sole proprietorship; partnership; and corporation) and discuss advantages and disadvantages as to taxation, protection from legal liability and access to capital. Specifically comment on how each structure is taxed.

Answer 1

Definitions

Sole Proprietorship - Sole proprietorshipp is a business structure in which individual owner is manages business. The sole owner is responsible for all the liabilities and owns all the assets of the business.

Partnership = Partnership is a business structure which is formed by two or more partners. It may or may not be registered. A partnership deed defines all the responsibilities, profit share and powers of all partners.

Corporation -Corporation is an organization which is governed by the charter and operated by board of directors. There is separation in ownership and management in this business form.

Advantages and Disadvantages of thre forms of business:

Basis of Difference	Sole Proprietorship	Partnersip	Corporation
Taxation	As per the tax laws, Business income earned by sole proprietor is taxed in the hands of the owner.	All the partners in partnership firm are jointly and severlly held liable to pay tax, interest or penalty or any other sum payable by firm for relevant assessment year.	Corporation is separate legal entity and the tax is imposed on net income of the corporation.
Protection from Legal Liability	The liabiltiy of the owner is unlimited to the extent of total liabilioties of a business. If the assets of an organization is unable to meet the liabilities, personal assets of owner may be used to repay those liabilities.	The treatment of legal liability is same in sole proprietorship and partnership. Personal assets of partners can be used to meet out debt obligations.	As company and owners are separate in case of corporation. The liabilities of shareholders are limited to the extent of their own contribution. Limited liability is an advantage of Corporation business structure.
Access to Capital	In case of sole proprietorship, there is limited capital as less funds can be raised as compared to corporation.	Partnership firm, relatively raise more capital as more partners are involved. Therefore, relatively more capital can be raised as compared to sole proprietorship.	Corporation can raise more capital through issue of shares or other fixed interest funds. Also, corporations have more credibility to raise funds.