Wize University Introduction to Financial Accounting Textbook > Introduction to Financial Accounting
Forms of Business Organization
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Sole-proprietorship
The most simple form of business organization is the sole-proprietorship, however, roughly 72% of businesses fall into this category.
Characteristics of a Sole-proprietorship
- Owned by a single individual
- The owner and the business are the same legal entity.
- Income added to owner's personal income for tax purposes.
Advantages
- Simple and inexpensive to set up.
- Owner receives all profits earned by the business.
- Easily dissolvable
Disadvantages
- Owner is personally responsible (liable) for the business's debts (unlimited liability).
- Difficult to raise capital.
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Partnerships
When two or more people wish to go into business together, the most basic form of corporate organization available to them is a partnership.
Characteristics of a Partnership
- Owned by two or more people.
- No separate legal entity.
- Formalized in a written partnership agreement that describes:
- Each partner's contribution
- How profits are shared
- How to resolve disputes
Advantages
- Easy to form.
- More capital available.
Disadvantages
- Owners are personally responsible for obligations (unlimited liability)
- Except for limited/silent partners (limited liability)
- Potential for conflicts
- Profit-sharing can be complicated.
- Difficult to dissolve or to transfer ownership.
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Corporations
Corporations account for less than 20% of all organizations' businesses, however, they are responsible for over 80% of sales.
Characteristics of a Corporation
- A separate legal entity from its owners (called shareholders)
- Can be public or private
Advantages
- Owners are not personally responsible for business obligations (limited liability)
- Indefinitely (Unlimited) legal life
- Ownership is easily transferrable
- Easier to raise capital
Disadvantages
- More costly and more complex to set up than sole-proprietorships and partnerships.
- Double taxation
- Corporation's income is taxed at the corporate level
- Owners are taxed on dividends at the personal level
Practice: Forms of Business Organization
Answer the following multiple choice questions.
In what way is a corporation more advantageous than a partnership or sole-proprietorship?