SOLE PROPRIETORSHIP,

PARTNERSHIP &
CORPORATION
A business is defined as an enterprising entity engaged in commercial,
industrial, or professional activities. Businesses can be for profit entities or they
can be non-profit organizations that operate to fulfill a charitable mission or
further a social cause.
Three Forms of Business Organization

SOLE PROPRIETORSHIP - the simplest business form under which one can operate a business. This is
not a legal entity, it simply refers to a person who owns the business and is personally responsible for
its debts. It can operate under the name of its owner or can do business under a fictitious name as its
trade name.

Characteristics of Sole Proprietorship:

● Single ownership
● No sharing of profits and loss
● One man”s capital
● Unlimited liability
● Less legal formalities
● One man control
 PROS AND CONS OF A SOLE PROPRIETORSHIP

PROS:

● Easy setup and low cost

● No Corporate Business Taxes
● No annual Reports/Filings
● Not restricted by formal business structures

CONS

● Unlimited Liability
● No Ongoing Business Life
● Difficult to raise money
● Inability to take on business debts
PARTNERSHIP - is a contract between two or more persons which bind themselves to
contribute money, property or industry to a common fund with the intention of dividing
profits among themselves.

PROS CONS

Extra set of hands Less Independence

Additional knowledge Potential conflict

Reduced financial problem Divided profits

Less paperwork Lack of separation from business

Fewer tax forms Individual taxation

CORPORATION -

● a legal entity that is separate from its owners

● Make profits, be taxed and can be held legally liable
● Offer strongest protection to its owners from personal liability
● Cost to form a corporation is higher than other structures
● Requires more extensive record-keeping, operational processes, and reporting.

Advantage of forming a corporation:

1. Personal liability protection

A corporation provides more personal asset liability protection to its owners than other
entity type. For example, if a corporation is sued, the shareholders are not personally
responsible for corporate debts or legal obligations- even if the corporation doesn’t have
enough money in assets for repayment. This is one of the main reasons businesses choose
to incorporate
2. Business security and perpetuity

Corporation ownership is based on percentage of stock ownership, which offers much more
flexibility than other entity types in terms of transferring ownership and perpetuating the
business for the long term.

3. Access to capital

Since most corporations sell ownership through publicity traded stock, they can easily raise
funds by selling stock. This access to funding is a luxy that other entity types don’t have. It is
great not only for growing a business, but also for saving a corporation from going bankrupt in
times of need.

4. Tax benefits

Any income designated as owner salary will be subject to self-employment tax, whereas the
remainder of the business dividends will be taxed at its own level (no self-employment tax).
DISADVANTAGES OF FORMING A CORPORATION

1. Lengthy application process

Filing your articles of incorporation with your secretary of state can be quick,but the overall process of
incorporating is often a long one.You have to prepare extensive paperwork and documentation of the details
of the organization.You need to draft and maintain corporation bylaws, appoint a board of directors, create a
shareholders ownership change agreement, issue stock certificates, and take minutes during meetings.

2. Rigid formalities, protocols and structure

Alongside the lengthy application process is the amount of time and energy necessary to properly maintain a
corporation and adhere to legal requirements. You have to follow many formalities and heavy regulations to
maintain your corporation status. For example, you need to follow your bylaws, maintain a board of
directors, hold annual meetings, keep board minutes and create annual reports.

3. Expensive

Corporations are expensive to form and operate. It might be easy for established corporation to raise capital
by selling shares. But forming and maintaining a corporation can be costly.