Question

Explain the difference between proprietorships, partnership, and corporations based on owners, life of the organization, liability of owners, and legal status?

Answer 1

The differences are discussed below:

1. Owners – A proprietorship has only one owner who is called the sole proprietor. A partnership firm has got two or more than two owners. These owners are called partners. An S corporation can have up to 75 owners while an LLC can have an unlimited number of owners. The owners in a corporation are called shareholders.

2. Life of the organization – The life of a proprietorship depends on the life of a sole proprietor. When the sole proprietor dies the entity and existence of a proprietorship also ceases to exist. On the other hand the life of a partnership is depended on the life of its partners but to a lesser extent than a proprietorship. When one of the partners dies or exits the partnership the current partners can carry on the partnership firm. New partners can also be added by amending the partnership contract. A corporation is a going concern and its life goes on forever. Shareholders and owners will go but a corporation usually goes on forever.

3. Liability of owners – In case of a proprietorship a sole proprietor is personally liable for all the debts of the firm. Thus a sole proprietor has unlimited personal liability. In case of partnership also it is the partners who are personally responsible for business debts. But in the case of a corporation the liability of the owners is limited to the extent of the value of shares held by them. Shareholders in a corporation are not liable for corporate debts.

4. Legal status – A sole proprietorship is not a separate legal entity and the entity of a sole proprietorship is derived from the entity of the sole owner of the business. Partnership firms and corporations have separate legal entities of their own (independent of and different from the legal status of the owners). A partnership firm and a corporation have to file their own income tax returns, deposit taxes in their names and register legal documents in their names.