In the United States there are four basic forms of business organization: sole proprietorships (one owner), partnerships (general and limited), corporations, and limited liabiiity companies (LLCs). Sole proprietorships outnumber the others combined by over 2 to 1, but corporations rank first by far when measured by sales, assets, profits, and contribution to national income. As this section unfolds, you will discover some of the pluses and minuses of each alternative form of business organization.
The sole proprietorship is the oldest form of business organization. As the title suggests, a single person owns the business, holds title to all its assets, and is personally responsible for all of its debts. A proprietorship pays no separate income taxes. The owner merely adds any profits or subtracts any losses from the business when determining personal taxable income.
This business form is widely used in service industries. Because of its simplicity, a sole proprietorship can be established with few complications and little expense. Simplicity is its greatest virtue.
Its principal shortcoming is that the owner is personally liable for all business obligations. If the organization is sued, the proprietor as an individual is sued and has unlimited liability, which means that much of his or her personal property, as weil as the assets of the business, may be seized to settle claims. Another problem with a sole proprietorship is the difficulty in raising capitai. Because the life and success of the business is so dependent on a single individual, a sole proprietorship may not be as attractive to lenders as another form of organization.
Moreover, the proprietorship has certain tax disadvantages. Fringe benefits, such as medical coverage and group insurance, are not regarded by the Internal Revenue Service as expenses of the lirm and therefore are not fully deductible for tax purposes. A corporation often deducts these benefits, but the proprietor must pay for a major portion of them from income left over after paying taxes. In addition to these drawbacks, the proprietorship form makes the transfer of ownership more difficult than does the corporate form. In estate planning, no portion of the enterprise can be transferred to members of the family during the proprietor's lifetime. For these reasons, this form of organization does not afford the flexibility that other forms do.