Types of Business Organizations

It is essential to understand the various ways companies can exist in the US and the impact that company structures have on taxes, regulations, liability, and decision-making. In these sections, you will learn the difference between sole proprietors, partnerships and corporations, and how you decide which form is best for your business.

Pros and Cons of Sole Proprietorship

The sole proprietorship structure has the benefit of simplicity and control but the drawback of unlimited liability.


LEARNING OBJECTIVE

  • Describe the key characteristics of a sole proprietorship


KEY POINTS

    • The sole proprietorship is a type of business structure open to businesses run and owned by one entrepreneur.
    • A large advantage of the sole proprietorship structure is its ease. The sole proprietorship structure does not require filing of articles of incorporation, regular meetings, or election of a board. A sole proprietor also files taxes as personal income.
    • The other side of this process is the structure's main disadvantage: there is no separation between the entrepreneur and the business. This means the sole proprietor is personally liable for business losses. Also, if the proprietor dies, the business ceases to exist.


TERMS

  • proprietor

    An owner

  • entrepreneur

    A person who organizes and operates a business venture and assumes much of the associated risk.

Overview of Business Structures

Business organizations can be structured in two major ways, namely, in terms of their structures as legal entities and also in terms of the internal structure and management processes. The sole proprietorship is one type of business structure from a legal status perspective. It is a structure open to businesses run and owned by one entrepreneur.


Sole Proprietorship: Pros and Cons

A large advantage of the sole proprietorship structure is its ease of filing incorporation and tax documents as well as having uninterrupted control of the business. The sole proprietorship is one type of business structure in the US that does not require formal incorporation, meaning that sole proprietors do not need to formally file articles of incorporation, hold regular meetings, or elect an advising or directing board. This simplicity is also reflected in tax treatment, as a sole proprietor files taxes as personal income. Sole proprietors also have control over the aspects of their business without the involvement of elected board members.

On the flip side, the sole proprietorship has one main disadvantage: there is no separation between the entrepreneur and the business. With sole proprietorships, like some forms of partnership, owners can be personally liable for business losses, meaning their personal assets are not protected against the claims of creditors. The sole proprietorship is not a separate entity from the owner/entrepreneur, unlike a corporation. As a result, if the proprietor dies, the business ceases to exist. Because the enterprise rests exclusively on one person, it often has difficulty raising long-term capital.