To understand the difference and similarity of businesses study the Table carefully. Major Business Forms Compared

№

Item

Sole Proprietorship

Partnership

Corporation

Creation

Few, if any requirements (easiest to organize)

By agreement of partners (generally should be written; limited partnerships must complete and file a statutory form)

By statutory authorization (must meet state requirements to receive a state charter)

Governmental regulation of business structure

Almost none

Little, except for limited or other special partnerships

The most

Governmental regulation based on the type of business (products, markets etc)

Yes

Yes

Yes

Owners

The proprietor

The partners

The stockholders

Liability of individual owners for business debts or actions

Unlimited

Unlimited, except that in a limited partnership the limited partners usually can lose only their investmrnts

Limited; stockholders generally can lose only their actual investments

Transfer of owner’s interest

By sale of business, inheritance, or any other lawful means chosen by proprietor

Buyer can receive some but not all rights of a partner unless other partners agree; limited partner’s interest is freely transferable

In most cases the stock is freely transferable

Profits and losses

Solely the proprietor’s

Shared equally by partners unless partnership agreement states otherwise

Calculated after paying salary to employees, including officers; profits are retained by corporation and or distributed pro rata to stockholders as dividends

Management

The proprietor

General partners – equal votes unless expressly stated otherwise in the partnership agreement; limited partnership – limited partners have no management rights

Management distinct from owners; officers are appointed by directors, who are elected by stockholders

Income taxes

Profits part of personal income; no separate tax for the proprietorship

Each partner’s share of profits (whether distributed or not) is part of his/her personal income; no separate tax for the partnership

“Double taxation” – corporation pays income tax on net profits (no deductions for dividends); each stockholder’s dividends are part of his/her personal income and thus are taxed

Termination

By sale, or voluntary cessation of business; or by death or incapacity of proprietor

By terms of partnership agreement; by agreement of partners; by death, incapacity or withdrawal of one or more partners; or by sale or voluntary cessation of business

Can have perpetual existence, as provided by statute and/or articles of incorporation; can continue despite death, incapacity or withdrawal of officers, directors and/or stockholders

Size of business

Can be substantial, but tends to be small

Can be substantial, but tends to be small

Varies from small to the largest business entities in existence: most significant businesses are or become corporations