What is a Sole Proprietorship?

The sole proprietorship is a popular business form due to its simplicity, ease of
setup, and nominal cost. A sole proprietor need only register his or her name and
secure local licenses, and the sole proprietor is ready for business. A sole
proprietorship, also known as a sole trader or a proprietorship, is an unincorporated
business with a single owner who pays personal income tax on profits earned from
the business. With little government regulation, a sole proprietorship is the
simplest business to set up or take apart, making sole proprietorships popular
among individual self-contractors, consultants or small business owners.

Advantages of a Sole Proprietorship

 Having control of your business

You are in control since you are the only owner of a sole proprietorship; you
are in complete control of your business. All of the decisions are yours to
make.
 A simplified and less expensive business organization
There are no forms to complete, and no government fees to pay, to form a
business as a sole proprietorship. Forming a general partnership typically
doesn't require any government forms, but it is advisable to have a formal
partnership agreement in order to outline the rights and duties of the
partners, and to resolve any disputes that may arise.
 Privacy
Since a sole proprietorship does not file any formation documents or annual
reports with the federal or state governments, your business operations are
not subject to public disclosure like an LLC or corporation.
 Minimal reporting requirements
A sole proprietorship does not need to file an annual report with the state or
federal governments. In most cases, partnerships do not need to file an
annual report; however, LLCs and corporations will be required by law to
conduct certain meetings of members or shareholders, and file certain
reports with the state government.
 Simplified tax reporting
 The sole proprietorship tax advantages are simplified reporting requirements
and not having to pay separate taxes for the business.

Disadvantages of a Sole Proprietorship Business

 Liability Is Unlimited
Undoubtedly, the most serious disadvantage of a sole proprietorship is the
unlimited exposure to liabilities and lawsuits. Unlike a corporation, the
personal assets of the owner can be confiscated in the event of adverse legal
actions.
 Difficult to Raise Capital
A sole proprietorship cannot raise capital by selling stock or using other
means to attract unrelated investors. The difficulty of attracting outside
capital forces the owner to rely on his own savings and loans from friends
and family.
 Lenders Are More Wary
Lenders are more concerned about risks when making loans to a sole
proprietor. Banks prefer to base their loans on a company's financial
statements rather than having to consider the assets of the owner. Quite
often, the credit rating of the owner is not sufficient to meet the lenders'
standards.
 Owner Controls Everything
In the beginning, the owner makes all the decisions and does most of the
work himself. Doing everything may be okay at first, but this becomes more
difficult as the business grows and adds employees.
 Liquidation of Business
If the owner passes away, the business will be liquidated. Unlike a
corporation, a proprietorship does not survive the owner unless he has made
preparations to will the assets to someone before his death.

What is a Partnership?
A partnership is a formal arrangement in which two or more parties
cooperate to manage and operate a business. Various partnership
arrangements are possible in which all partners might share liabilities and
profits equally or some partners may have limited liability.

Features of Partnership
The essential features and characteristics of a partnership are:

1. Agreement: The partnership arises out of an agreement between two or

more persons.
2. Profit sharing: There should be an agreement among the partners to share
the profits of the business.
3. Lawful business: The business to be carried on by a partnership must
always be lawful.
4. Membership: There must be at least two persons to form a partnership.
The maximum number is 20. But in case of banking business the maximum
is 10 members.
5. Unlimited liability: The liability of every partner is unlimited, joint and
several.
6. Principal-agent relationship: Every partner is an agent of the firm. He can
act on behalf of the firm. He is responsible for his own acts and also for the
acts done on behalf of the other partners.
7. Collective management: The firm and the partners are one. When a
contract is made in the name of the firm all the partners are responsible for it
individually and collectively.
8. Non-transferability of shares: A partner cannot transfer his share of
interest to others without the consent of the other partners.

Advantages of Partnership
The following are the advantages of partnership business:
1. Easy to form: A partnership firm can be formed without any legal
formalities and expenses. Even if the fum is to be registered, the expenses
are not much compared to company form of organization.
2. Access to more capital: A firm consists of more than one person.
Therefore it can secure more capital from combined resources
3. Skill and talent: Talented persons may be taken as partners. More skill and
talent will be available..
4. Division of labor: Division of labor can be introduced which increases the
efficiency in the management. One partner may take care of purchases,
another sales, a third accounts and so on.
5. Contact with customers: All the partners in a firm may take part in the
management of the business. So, they get in touch with the customers during
the course of the business. It enables them to study the tastes and needs of
the customers.
6. Borrowing capacity: The creditors will lend Loans not only on the basis of
the firm’s assets but also based on the personal properties of the partners. So
the borrowing capacity of a firm is more.
7. Incentive to work hard: Every partner is liable for the debts of the firm.
Also every partner has a share in the profits. This makes them to work hard
for the success of the business.
8. Expansion of business: Due to the availability of sufficient finance and
skill the business can be expanded very easily.
9. Wise decisions: In partnership, decisions are taken with the consultation
of all the partners. So naturally the decisions are wiser and more beneficial.
10. Co-operation between partners: The partnership enables partners to
provide mutual help to each other. Partners behave as members in a joint
family.
11. Flexibility: Changes in the business can be adopted easily. There are no
legal restriction
12. Economy in operation: If there is co-operation among the partners the
firm can be run efficiently. A good number of economies in management
can be derived.
13. Division of risks: All losses and risks of the business are shared by all
the partners. So risky ventures can also be taken up.
14. Maintenance of secrets: Business secrets can be maintained easily if the
number of partners in a firm are limited.
15. Incidence of tax: Compared with company form of organization the tax
payable on the incomes of the partners will be less.
Disadvantages of Partnership
The following are the disadvantages of a partnership firm:
1. Division of responsibility: In a partnership the management is divided. As
such responsibilities are also divided. Every partner might try to shift the
burden on to the shoulders of others; finally none takes the responsibility
properly.
2. Delay in decisions: Sometimes the partners may not agree with one
another in taking decisions. As a result partners will not be in a position to
take quick decisions.
3. Lack of continuity: A partnership gets dissolved on the death, insolvency,
insanity or retirement of any partner. So, there is no guarantee for the
continuity of the firm.
4. No transferability of share: In a firm the partner cannot transfer his share
of interest to others without the consent of the other partners.
5. Lack of secrecy: It may not be possible to maintain secrecy in partnership
because of the number of partners.
6. Unlimited liability: The creditors of a firm can recover their loan amounts
from the personal properties of the partners when the firm’s sources are not
enough. Therefore the personal properties of the partners are not safe..
7. Joint and several liability: Every partner is jointly and separately liable for
the firm’s debts. In case of insolvency of partners, the solvent partners have
to pay the debts of the insolvent partners also.
8. Internal conflicts: Differences and disputes among the partners are very
common. These conflicts harm the firm as a whole.
9. Misuse of assets: The partners may use the assets of the firm for their
personal purposes. Misuse of assets is harmful to business interests.
10. Lack of public confidence: A partnership firm is purely a private
organization. It is not controlled or regulated by the Government. As such
public may not have confidence in the firm.

What is a Corporation
A corporation is a legal entity that is separate and distinct from its owners.
Corporations enjoy most of the rights and responsibilities that an individual
possesses: enter contracts, loan and borrow money, sue and be sued, hire
employees, own assets and pay taxes. Some refer to it as a "legal person."
A corporation is a union of natural persons that has its own legal status. ... A
corporation's status and capacity is determined by the law of the place of
incorporation. Investors and entrepreneurs often form joint stock companies.
Therefore, the term corporation often means such business corporations.
What is the difference between a sole proprietorship, partnership, and
corporation?
There are many differences between these three types of entities.
Unfortunately, there is not enough space to go through the intricacies here,
but I can give you a brief overview.

Sole Proprietorships: Basically, a sole proprietorship is not a legal entity,

and refers to a business which is solely owned by one person. This one
person is personally liable for the debts and expenses of this type of
business. This is the simplest form for a company to use. They are
advantageous to owners because they are simple to form, and have nominal
costs compared to other types of ownership. However, sole proprietorships
are problematic because the owner’s personal assets can be reached by
creditor’s for business matters.

Partnerships: This is a business owned by two or more people, who share

equally in profits and losses. Partnerships involve a number of different legal
considerations that you should familiarize yourself with. Also, there are
different types of partnerships (such as general partnerships, limited
partnerships, joint ventures), so you need to have a good understanding of
what will work best for your company.

Corporations: These are separate legal entities that are owned by the
shareholders. Corporations are much more complex and are typically used
by larger businesses. They have more costly administrative fees and more
complicated tax and legal requirements. Corporations are afforded the
opportunity to sell ownership shares through stock offerings. There are also
different classifications of Corporations (such as C-Corps, S-Corps, Closely
Held Corps.), so once again, you will need to have a good idea of what your
company’s best option is.