Question

3. List 3 types of entities and explain how each differs. (5 Points each)

Answer 1

Generally speaking, there are three basic types of legal entities in which business can be conducted:

(1) sole proprietorship,

(2) partnership, and

(3) corporation.

Within each category, there are several variations.

Sole proprietorship - one person business. You don't need a separate license, all taxes go through your personal filing. The downside is that you personally take on all the risk. If the “business” gets sued, you are personally liable.

Partnership - just like it sounds, a legal form where multiple people co-own the business. Depending on the format, can have similar liability issues as a sole proprietorship.

Corporation - you may have heard that corporations are people. This is essentially how they are treated under US law and why they are so advantageous. If I am a stockholder in a corporation I bear zero liability: I can lose the value of my stock but no more, my personal assets are separate from the corporation and therefore protected. The downside is “double taxation”: the corporation pays taxes on its profit, then when I receive dividends (or make a profit on the sale of stock) I pay taxes as well.

*Difference among Sole-Proprietorship, Partnership and Company

Difference # Sole Proprietorship:

1. Easiest to form.

2. Very limited finances.

3. Unlimited liability.

4. Least stable

5. Not much managerial efficiency; because of one man’s limited abilities and capacity to manage.

6. Practically nil government regulation and control.

7. Maximum flexibility possible.

8. Absolute secrecy possible.

9. No sharing of profits.

10. Maximum personal attention to customers is possible.

Difference # Partnership:

1. Easy to form; need to have a partnership agreement

2. Finances limited; but not very limited.

3. Unlimited liability

4. Somewhat stable; but differences among partners may lead to dissolution of partnership.

5. Management quite efficient; because of collective wisdom of partners, in decision-making.

6. Partnership Act applies; only when the Partnership Deed is silent on any point.

7. Flexibility possible due to joint decisions of partners.

8. Secrecy possible due to common interest of partners.

9. Sharing of profits among partners.

10. Partners may also pay personal attention to customers.

Difference # Company:

1. Difficult to form. Numerous legal and procedural formalities involved.

2. Possible to arrange huge finances.

3. Limited liability.

4. Most stable. Company enjoys perpetual succession.

5. Management very efficient; because of professionally qualified and expert directors and managerial staff.

6. Strict governmental regulation and control through numerous provisions of the Companies Act.

7. Flexibility not possible due to legal and procedural problems.

8. Secrecy not possible; due to public exposure of business affairs.

9. Sharing of profits, by way of distribution of dividends.

10. Because of large size and divorce between ownership and management; personal attention to customers is not possible.