The three most common forms of business organization are the sole proprietorship, the partnership, and the corporation. Business laws and the usage of company titles in some countries may vary from the definition and description of each form of business organization given below.

Sole Proprietorship

Sole proprietorship---single proprietorship or individual proprietorship---is the simplest form of business organization. As the name suggests, the business is owned by one person.

Advantages of Sole Proprietorship

Not many formalities are needed to establish a sole proprietorship. Start-up costs are low and working capital requirements are minimal. The owner manages and controls the business, free from outside interference, except for government regulations. All profits go to the owner. The owner is free to choose to reinvest the profits in the business or to dispose of them. Possible tax advantage.

Disadvantages of Sole Proprietorship

The liability of sole proprietor is unlimited. The owner is personally liable for all the debts of the business to the full extent of the owner's property. Illness of the owner may interrupt the business and the owner's demise may terminate it. It can be difficult to raise capital.

Partnership

In a partnership form of business, there are two or more owners known as partners. The partnership law differs from country to country and the applicable terms to the partnership vary. A partnership business can be a limited partnership or an unlimited partnership.

In a limited partnership, at least one partner, but not all partners, assumes limited liability---liability only to the extent of the capital the partner has contributed to the partnership. The company name may end with the words "Co. Ltd.", "Company Limited", "Ltd.", "Limited", or their equivalent in other languages.

In Europe and some other areas, the words "Limited Company", "Limited Partnership", or their equivalent in other languages may signify a corporation.

In an unlimited partnership, all partners assume unlimited liability---liability for the partnership debts to the full extent of the their personal property. The company name may end with the word "Co." or "Company", or its equivalent in other languages.

Advantages of Partnership

Partnership is easy to form. Start-up costs are low. The partners provide additional sources of venture capital. The management base is broader. It is free from outside interference, except for government regulations. Possible tax advantage.

Disadvantages of Partnership

Partners assume unlimited liability in an unlimited partnership. It lacks continuity---death of a partner dissolves the partnership. The authority is divided. The profits are divided among partners in a proportion agreed upon in the partnership contract. It can be difficult to raise additional capital. Often it is difficult to find suitable partners.

Classifications of Partners in the Partnership

The partners are generally classified according to the extent of the liability, contribution to the partnership, and management participation.

• Extent of the liability: the limited partner and the unlimited partner
  

  A limited partner assumes limited liability---liability only to the extent of the capital the partner has contributed to the partnership.

  An unlimited partner assumes unlimited liability---liability for the partnership debts to the extent of the partner's personal property.

• Contribution to the partnership: the capital partner and the industrial partner
  

  A capital partner contributes cash and/or assets to the partnership. The capital partner may or may not be active in the management of the partnership.

  An industrial partner contributes service to the partnership. The industrial partner is active in the management of the partnership.

• Management participation: the general partner and the silent partner
  

  A general partner participates in the management of the partnership. An industrial partner is a general partner. A capital partner can be a general partner.

  An silent partner does not participate in the management of the partnership. A capital partner may or may not be a silent partner.

Corporation

A corporation is a legal entity---an artificial being, invisible, intangible, and existing only in the contemplation of law. Corporate laws vary from country to country. Legal advice is necessary to form a corporation. The corporate name may end with the word "Corp.", "Corporation", "Inc.", "Incorporated", or its equivalent in other languages.

A corporation is limited in duration by law. It can have a legal life of generally 20 or more years. The articles of incorporation---certificate of incorporation or corporate charter---specify the details of the organization. A corporation requires a minimum number of persons, generally 3 or more. The ownership of the corporation is represented by its capital stock, which is divided into identical units or groups of identical units called shares or stocks. These shares are represented by the written instruments known as stock certificates. Stock certificates are usually classified into common stock and preferred stock, with different preferences, restrictions and limitations. The owners of the shares are called stockholders.

A corporation can be public or private. In a public corporation, anyone can become a shareholder and its stocks are usually traded on a stock exchange. In a private corporation, the number of shareholders is restricted and its stocks are not traded on a stock exchange.

Advantages of Corporation

The liability of stockholder is limited to the stocks owned. The ownership is transferable without affecting the corporate existence. It enjoys continuous succession. It is easier to raise large sums of capital through the sale of stocks to the public. Management is specialized, concentrated in the hands of a Board of Directors. Possible tax advantages.

Disadvantages of Corporation

The corporation is the most expensive form of business organization. It is closely regulated. It requires extensive record keeping. There is double taxation---the corporation is a legal entity required by law to pay income tax, the stockholder is also required to pay income tax on dividends, that is, the earnings from stocks received from the corporation.