Advantages and disadvantages of proprietorship, partnership, and corporation

¶ … Business: Comparisons and Contrasts

In this essay, the author will compare and contrast the advantages and disadvantages of proprietorship, partnership and incorporation as business strategies. These advantages and disadvantages need to be weighed before choosing upon a form for a business.

A sole proprietorship is the simplest and least costly way for a person to starting a business. The sole proprietorship can be formed by picking out a location and then opening the door for business. There are likely to be fees to obtain business name registration, a fictitious name certificate and other necessary licenses. Attorney's fees for starting the business will be less than the other business forms because less preparation of documents is required and the owner has absolute authority over all business decisions (Gerstein).

A partnership can be made in several different types. The two most common types are general and limited partnerships. A general partnership can be formed simply by an oral agreement between two or more persons, but a legal partnership agreement drawn up by an attorney is highly recommended. Legal fees for drawing up a partnership agreement are higher than those for a sole proprietorship, but may be lower than incorporating. A partnership agreement could be helpful in solving any disputes. However, the business partners are responsible for the other partners' business actions, as well as their own. The key sticking point is the partnership agreement (ibid).

A partnership agreement should include some or all of the following:

1. Listing of the type of business

2. The amount of equity that is invested by each partner

3. The divisions of profits and losses in business operations

4. The compensation that the partners can expect

5. The distribution of assets that the partners can expect upon dissolution

6. The duration of the partnership

7. Provisions for changes or dissolving the partnership.

8. A dispute settlement clause.

9. A list of restrictions of authority and expenditures.

10. Settlement in case of death or incapacitation (ibid).

Compare

The advantages of a sole proprietorship or a partnership is that they cost much less to establish than a corporation. Additionally, sole proprietorships and partnerships have very minimal formalities. There is much more freedom and less government dictating structuring. A disadvantage of these forms of business organization is that sole proprietors and partners are not liable for unemployment insurance ("Legalzoom.com") .

In cases of a corporation, a business may incorporate without the services of attorney, but legal advice is recommended. The corporate structure is more complex and more costly to organize than the other two business formations. Control of the business depends on stock ownership. Persons who possess the largest stock ownership, not the total number of shareholders, control the corporation. The control of stock shares or 51% of stock gives a person or group the ability to make policy decisions. The control is exercised by at regular board of directors' and annual stockholders' meetings. Records have to be kept to document decisions that are made by the board of directors. In small, closely held corporations operations are more informal, but record-keeping is not eliminated entirely. Officers of a corporation can be liable to stockholders for improper actions. Liability is generally limited to stock ownership, except where fraud is involved (ibid).

The most important attribute of a corporation is that shareholders in the company are not liable for corporate debts. This is the probably the most important attribute of a corporation. In contrast, in a sole proprietorship or a partnership, the owners are personally responsible for all of the business debts. If the assets found in the sole proprietorship or partnership are not adequate to satisfy the debt, creditors can go after each owner's personal assets, such as their bank account, house, or other property to make up the difference of what is owed. In the case of a corporation running out of funds, the owners are usually not liable (ibid).