Question

Define Sole Proprietorship, Partnership, Corporation.

List the pros and cons of these business characteristics.

Answer 1

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 day-to-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.

The main advantages that differentiate the sole proprietorship from the other legal forms are

• You're the boss.

• It's easy to get started.

• You keep all profits.

• Income from the business is taxed as personal income.

• You can discontinue your business at will.

Disadvantages

• You assume unlimited liability.
• The amount of investment capital you can raise is limited.
• You need to be a generalist. Retaining high-calibre employees is difficult.
• The life of the business is dependent on the owners.

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.

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.

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

Advantages

• Stockholders have limited liability.

• Corporations can raise the most investment capital.

• Corporations have an unlimited life.

• Ownership is easily transferable.

• Corporations utilize specialists.

Disadvantages

• Corporations are taxed twice.

• Corporations must pay capital stock tax.

• Starting a corporation is expensive.

• Corporations are closely regulated