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Types of Business Organizations

When you decide to operate a business, the first question to be addressed is what legal form the business will take. There are three typical ways in which you may carry on a business: as a sole proprietorship, a partnership, or a corporation.


Sole Proprietorship

The sole proprietship is the simplest form of operating a business. Only one owner is responsible for making all of the business decisions and, therefore, earns all the profits, but also assumes all of the risks and obligations.

Most sole proprietorships tend to be small and localized. The advantages commonly associated with carrying on a sole proprietorship are the following: (1) ease in which to commence and dissolve the business; and (2) modest start up expenses.

There is, however, a significant disadvantage which may lead you to decide against choosing this business form, namely, unlimited liability. The owner is personally responsible for all of the debts and obligations incurred by the business. The owner is thus liable to the full extent of his/her personal assets for all of the liabilities and losses which are incurred by the business. Also, the owner is liable for the actions of employees in the course of their employment.

Most jurisdictions require that sole proprietorships register with the relevant government department or authority under the trade name it is operating under.


Partnership

A partnership is a relationship between two or more persons carrying on a business with a view to making a profit. The organization is usually more complex than that of a sole proprietorship and there is more than one owner to share in the profit and/or losses.

Some groups of individuals choose a partnership as the manner in which to carry on a business because of its ease of formation and dissolution, as well as its overall lack of formalities.

However, like a sole proprietorship, one of the primary disadvantages to choosing a partnership as your business form, includes the unlimited personal liability of each partner for all of the debts and obligations of the partnership. In other words, every partner is liable for all the debts incurred by the other partners while acting in the course of business, regardless of the capital contribution of individual partners.


Corporation

A corporation (also called "company") is a legal entity that has its own legal personality which is distinct from its owners (called shareholders) and the individuals who manage and run its affairs and business (called directors and officers). The creation of a corporation occurs following the proper filing of Articles of Incorporation (also called a Charter or Certificate of Incorporation) with the relevant government department or authority.

Every corporation is comprised of shareholders, directors and officers. Shareholders, as the name implies, are the ones who hold (i.e., own) the shares in the corporation. By reason of the votes that are usually attached to the shares, the shareholders control the corporation. If there is only one shareholder, that person has absolute control of the corporation. If the corporation has numerous shareholders, control of the corporation depends on who has a majority of the voting shares. However, the shareholders do not directly manage the corporation. They exercise their influence by electing and removing directors and approving or disapproving major corporate decisions.

One of the responsibilities of the shareholders is to elect the directors of the corporation, usually on an annual basis. Directors need not be shareholders of the corporation. The directors are responsible for supervising and administering the corporation's affairs, and appointing the officers, who are in turn responsible for the day to day running of the corporation.