The Legal Forms of Business Organization

1
 Forms of Business Organizations
• A business can be structured in various ways.
• Important to study because a firm’s legal structure affects its
operations.
• Traditionally single owners (proprietorship), partnership and
corporations operate business.

2
 Sole Proprietorship
• Business owned by a single individual.
• Popular because easier to start and lighter regulatory and
paperwork requirement than any other business forms.
• This form of business is initiated by the mere act of beginning
the business operations.

3
 Sole Proprietorship
• Advantages:
1. Easy, inexpensive to form.
2. Fewer government regulations.
3. Owner’s complete control over business activities.
4. Income of business not taxed separately.

4
 Sole Proprietorship
• Disadvantages:

1. Unlimited personal liability

~ Proprietors have unlimited personal liability for business debts so they can lose more than the
amount of money they initially invested. You might invest $10,000 to start a business, but can be
sued for $1 million if during company time one of your employees runs over someone with a car.
2. Life is limited to that of the owner who created it.
~ When the owner dies, the sole proprietorship no longer exists.
3. Difficulty in obtaining capital.
~ Banks are also hesitant to lend to a sole proprietorship because of a perceived
lack of credibility, when it comes to repayment, if the business fails or owner dies.
~ In order to bring in new equity investors require a change in the structure of the
business which is another reason why it is difficult for a proprietorship to raise new
capital.

5
 Partnership
• The primary difference between a partnership and a sole proprietorship is that the
partnership has more than one owner.
• A partnership is an association of two or more persons coming together as co-
owners for the purpose of operating a business for profit.

6
 Partnership
• Advantages
1. Low cost and easy to form.
2. Partnership’s income is taxed on an individual basis.
3. As compared to sole proprietorship banks are more willing to grant
loans to partnerships.

7
 Partnership
• Disadvantages
– Unlimited personal liability
• If one of partners is unable to meet his/her share of firm’s liabilities the
remaining partners will have to fulfill any unsatisfied claims.
– Life is limited to the life of the owners.
• It may end upon the withdrawal or death of a partner.
– Difficulty in transferring ownership.
• Transfer of ownership requires that a new partnership be formed.

8
 Corporation
(From Latin word ‘corpus’ meaning body)

• Large firms across the world are normally organized as corporations.

• Public corporations are legally independent entities entirely separate from their
owners.
• Most large businesses are incorporated as companies.
• Corporations hold rights and obligations of individual persons (own property, sign
contracts, pay taxes).
• Ownership of corporation is reflected in common stock certificates, each designating
the number of shares owned by its holder.

9
 Corporation
• Advantages
– Transfer of ownership
• Through exchange of stock.
– Limited liability
• Shareholders are not personally liable for the debts of the business.
• For example, in a well-structured corporation, creditors cannot pursue
owner's/shareholder's personal assets for the corporation’s debts.
– Ease of raising large amount of capital to operate large businesses
• For example, corporations have the option of issuing bonds or share
certificates to investors.
• Can borrow money at lower rates.
– Unlimited life
• Perpetual existence.

10
 Corporation
• Disadvantages
– Earnings subjected to ‘double taxation’.
– Starting a company is a costly and time consuming process.

11
12