There are three legal forms of business, each having certain advantages and disadvantages, as belows:
- proprietorship,
- partnerships, and
- corporations.
Proprietorship:
A proprietorship is a business owned by one individual. This person is responsible for the firmâ??s policies, owns all its assets, and is personally liable for its debts. A proprietorship has two major advantages. First, it can be formed easily and inexpensively. No legal and organizational requirements are associated with setting up a proprietorship, and organizational costs are therefore virtually nil. Second, the earnings of a proprietorship are taxed at the ownerâ??s personal tax rate, which may be lower than the rate at which corporate income is taxed. Apart from personal liability considerations, the major disadvantage of a proprietorship is that it cannot issue stocks and bonds, making it difficult to raise capital for any business expansion.
Partnerships
A partnershi....
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There are three legal forms of business, each having certain advantages and disadvantages, as belows:
- proprietorship,
- partnerships, and
- corporations.
Proprietorship:
A proprietorship is a business owned by one individual. This person is responsible for the firmâ??s policies, owns all its assets, and is personally liable for its debts. A proprietorship has two major advantages. First, it can be formed easily and inexpensively. No legal and organizational requirements are associated with setting up a proprietorship, and organizational costs are therefore virtually nil. Second, the earnings of a proprietorship are taxed at the ownerâ??s personal tax rate, which may be lower than the rate at which corporate income is taxed. Apart from personal liability considerations, the major disadvantage of a proprietorship is that it cannot issue stocks and bonds, making it difficult to raise capital for any business expansion.
Partnerships
A partnership is similar to a proprietorship, except that it has more than one owner. Most partnerships are established by a written contract between the partners. The contract normally specifies salaries, contributions to capital, and the distribution of profits and losses. A partnership has many advantages, among which are its low cost and ease of formation. Because more than one person makes contributions, a partnership typically has a larger amount of capital available for business use. Since the personal assets of all the partners stand behind the business, a partnership can borrow money more easily from a bank. Each partner pays only personal income tax on his or her share of a partnershipâ??s taxable income.
On the negative side, under partnership law each partner is liable for a businessâ??s debts. This means that the partners must risk all their personal assetsâ??even those not invested in the business. And while each partner is responsible for his or her portion of the debts in the event of bankruptcy, if any partners cannot meet their pro rata claims, the remaining partners must take over the unresolved claims. Finally, a partnership has a limited life, insofar as it must be dissolved and reorganized if one of the partners quits.
Corporation:
A corporation is a legal entity created under provincial or federal law. It is separate from its owners and managers. This separation gives the corporation four major advantages:
- It can raise capital from a large number of investors by issuing stocks and bonds;
- It permits easy transfer of ownership interest by trading shares of stock;
- It allows limited liabilityâ??personal liability is limited to the amount of the individualâ??s investment in the business;Â
- It is taxed differently than proprietorship and partnerships, and under certain conditions, the tax laws favor corporations.
On the negative side, it is expensive to establish a corporation. Furthermore, a corporation is subject to numerous governmental requirements and regulations.
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