Comparing Business Structures: Sole Proprietorships to Corporations

MODULE 20.1: FEATURES OF CORPORATE ISSUERS LOS 20.a: Compare the organizational forms of businesses. Organizational forms refer to how businesses are set up from a legal and organizational point of view. Key features of organizational forms include the following: Whether the business is a separate legal entity from the owner(s) Whether the owners of the business also operate the business, and if not, the nature of the relationship between its owners and operators Whether the owners’ liability for the actions and debts of the business is limited or unlimited The tax treatment of profits or losses from the business Access to additional capital to fund expansion and to distribute risk To understand these features, we can compare them among four commonly used types of business structures: sole proprietorships, general partnerships, limited partnerships, and corporations. A sole proprietorship is a business owned and operated by an individual. Legally, the business is an extension of the ow

ner, meaning there is no legal distinction between the owner and the business. Here are the key features of a sole proprietorship:

1. Separate Legal Entity: No, the business is not a separate legal entity from the owner.
2. Ownership and Operation: The owner operates the business directly.
3. Liability: The owner has unlimited liability, meaning personal assets can be used to satisfy business debts.
4. Tax Treatment: Profits are taxed as personal income to the owner, which can simplify tax reporting.
5. Access to Capital: Limited access to capital, as funding typically comes from personal savings or loans.

A general partnership involves two or more individuals who share ownership and operation of a business. Here are the key features of a general partnership:

1. Separate Legal Entity: No, the partnership is not a separate legal entity from the partners.
2. Ownership and Operation: All partners typically participate in the management and operation of the business.
3. Liability: Partners have unlimited liability for the debts and obligations of the partnership.
4. Tax Treatment: Profits are passed through to the partners and taxed as personal income.
5. Access to Capital: Better access to capital than a sole proprietorship, as multiple partners can contribute resources.

A limited partnership consists of at least one general partner and one or more limited partners. Here are the key features of a limited partnership:

1. Separate Legal Entity: No, the limited partnership is not a separate legal entity from the partners.
2. Ownership and Operation: General partners manage the business, while limited partners typically do not participate in management.
3. Liability: General partners have unlimited liability, while limited partners have liability limited to their investment in the partnership.
4. Tax Treatment: Similar to general partnerships, profits are passed through to partners and taxed as personal income.
5. Access to Capital: Limited partners can provide capital without taking on management responsibilities, which can enhance access to funding.

A corporation is a more complex business structure that is recognized as a separate legal entity from its owners (shareholders). Here are the key features of a corporation:

1. Separate Legal Entity: Yes, a corporation is a separate legal entity from its owners.
2. Ownership and Operation: Owners (shareholders) do not typically operate the business; management is conducted by a board of directors and officers.
3. Liability: Shareholders have limited liability, meaning they are only liable for the debts of the corporation up to the amount of their investment.
4. Tax Treatment: Corporations are subject to corporate income tax, and dividends paid to shareholders may be taxed again at the individual level (double taxation).
5. Access to Capital: Corporations have greater access to capital through the issuance of stock and can attract investment from a larger pool of investors.

In summary, the choice of business structure affects various aspects of operation, liability, taxation, and access to capital. Each structure has its advantages and disadvantages, and the decision should be based on the specific needs and goals of the business owners.