Three Basic Legal Forms of Business Organizations

There are three basic legal forms of business organizations: the sole proprietorship, the partnership, and the corporation. Each form of legal organizations has unique characteristics that are important to consider when starting a business. The legal form chosen will make significant differences for things such as ownership, sources of financing, personal and financial risk, taxes, workload, buying or selling a business, and liability issues. A sole proprietorship is a business owned by a single individual. Sole proprietorships are the most common form of business organization. An individual owns, manages the business and is responsible for all transactions and activities. There is no difference between the owner and the business legally. As a result, the owner not only retains the revenue and title to all of the business’s assets, he is also responsible for all losses and liabilities incurred. Although a sole proprietorship must comply with all required licenses and permits necessary for its type of business to operate legally, there is no legal requirement to start the business operation. Terminating a sole proprietorship can be done if the owner chooses to do so or upon the owner’s death.
A partnership is very similar to a sole proprietorship, but with more than one owner. There are two types of partnerships: general partnerships and limited partnerships. In a general partnership, each partner is fully responsible and liable for the business and the acts of the partners. A partnership agreement dictates the relationship between the partners and can be either oral or written. In a limited partnership, one or more of the partners has limited liability, restricted to the amount of capital they have invested in the partnership. Essentially, a limited partnership can allow a partner to have limited liability and purely be an investor if several conditions are met. These include the requirement that at least one partner must have unlimited liability, the limited