Business organizations

1. What are three different ways that a business can be privately owned? There are essentially three basic ways to set up a privately owned enterprise: a sole proprietorship, a partnership, and a corporation. Each form of business organization has its advantages and disadvantages.

2. What is a sole proprietorship? A sole proprietorship is an unincorporated business that is owned and operated by one person called a sole proprietor or sole trader. It's the most commonly used form for new small businesses.

3. What are the advantages of a sole proprietorship?

Advantages of a Sole Proprietorship

• A sole proprietorship is the least costly and easiest form of business organization to launch and operate.

• A sole proprietorship is a business in which the owner is fully and personally responsible for all the obligations of the enterprise.

• A sole proprietor is entitled to all the company’s profits and takes complete managerial control.

• A sole proprietor is free to make any business decision – what kind of business activities to choose, who to hire or fire, when to take a vacation, when to liquidate his or her business and so on.

• There is preferential tax treatment. It means that any profit earned from the business is considered a sole proprietor’s income. The owner pays only personal income taxes on the business’s profits, which are reported as personal income on the proprietor’s individual income tax return.

4. What are the disadvantages of a sole proprietorship?

• Unlimited liability being the major disadvantage of a sole proprietorship means that a sole proprietor assumes the burden of any losses or liabilities the enterprise faces. A business owner is personally responsible for the company’s debts. It means that personal assets such as money from his bank account and the proceeds from the sale of his house can be taken to pay liabilities of the business.

• Limited resources refer to the owner’s personal financial resources and his or her ability to borrow.

• A sole proprietorship ends with a sole proprietor’s death.

5. What does unlimited liability mean?

Unlimited liability: a requirement that the owner or owners assume full responsibility for all losses or debts of a business.

6. What is a partnership?

A partnership is an association of two or more persons, who act as co-owners of an unincorporated business and operate it for profit. The way a partnership is established, run and taxed often makes it the most attractive form of business. To start a partnership it’s necessary to draw up a partnership agreement stating the terms of the partnership, the rules of how to manage it, each partners’ personal rights and liabilities.

7. What are the advantages of a partnership?

• A partnership is relatively easy and inexpensive to establish.

• There are more possibilities in raising funds because the borrowing power of two or more partners is greater.

• Each partner can benefit a partnership by his/her knowledge, skills or ideas and specializes in certain activities of the business.

• Like a sole proprietorship partnerships are subject to special tax treatment. Any profit of a partnership passes on to its owners, who report their portion of earnings on their personal income tax returns.