Corporate Finance → Business Structures
Business can take many forms. But, the three basic forms are:
- The Sole Proprietorship
- The Partnership, and
- The Corporation
The Sole Proprietorship
A sole proprietorship is a business owned by one person. The person, owner, is liable for all business debts and obligations. And, the profits of the business are taxed as individual income.
When two or more people get together to carry out business, they form a partnership. The partners (except limited partners who have limited liability) are liable for all business debts and obligations. The profits of the business are taxed as personal income to the partners.
The two main advantages of the sole proprietorship and the partnership are that it is easy to start with limited budget and have to pay taxes only on personal incomes. But, it is difficult for large business to exist as a sole proprietorship or a partnership, because of:
- Unlimited liabilities to the sole proprietors and the partners
- Limited life of the business, as it depends on the life, mood and the circumstances of the sole proprietors or the partners
- Difficulty of transferring ownership, and
- Limited budget and difficulty in raising cash
So, to carry out large businesses, usually corporations are formed.