Question

What are three legal forms of business organizations? What are their advantages and disadvantages?

Answer 1

Three legal forms of business organizations:

1. Sole Proprietorship

2. Partnership

3. Corporations

Sl. No.	Parameter	Sole Proprietorship	Partnership	Corporations
1.	Advantages	Quite simple to set it up Decision making is easy. Sole proprietor is the decision maker. Income of the Sole Proprietorship is treated as the income of the owner and thus taxed once in the hands of the owner Owner keeps all the profits	Relatively easy to set it up Two decision makers Income is shared between the two proprietors in the proportion of partnership Income is taxed once in the hands of the partners	Limited liability of the owners Multiple decision makers Company has a separate legal and valid identity. Transfer of ownership is easy Relatively higher ability to raise external capital More stable and permanent business entity
2.	Disadvantages	Owner has unlimited liability Owner has personal liability Business continuity is rare. The business usually perishes with the death of the owner. Raising external funds is very difficult	Personal liability of the partners Unlimited liability of he partners Presence of multiple partners may led to delay in decision making Partnerships may see conflict of opinion between the partners. Hence, they may be unstable. Raising capital is usually a chllenge.	Process of company formation is relatively complicated and may require legal help There is no tax pass through. The corporations have their own tax liabilities. Double taxation: Corporation has to pay tax on its earnings. And shareholders are taxed for the part of dividend income received by them. Conflict between the multiple decision makers.