- Ownership Structure:
Sole Proprietorship:
Owned and operated by a single individual.
No legal distinction between the owner and the business.
Partnership:
Owned by two or more individuals.
Can be a general partnership (all partners manage the business and are personally liable) or a limited partnership (with both general and limited partners).
Corporation:
Owned by shareholders who elect a board of directors to oversee the major policies and decisions.
Considered a separate legal entity from its owners.
- Liability:
Sole Proprietorship:
Owner has unlimited personal liability for business debts and obligations.
Partnership:
General partners have unlimited personal liability.
Limited partners have liability limited to their investment in the business.
Corporation:
Shareholders have limited liability, only to the extent of their investment in the corporation.
Personal assets are protected from business liabilities.
- Taxation:
Sole Proprietorship:
Income is reported on the owner’s personal tax return.
Subject to self-employment taxes.
Partnership:
Income is passed through to partners who report it on their personal tax returns.
The partnership itself does not pay income taxes but must file an informational return.
Corporation:
Subject to double taxation: the corporation pays corporate taxes on profits, and shareholders pay taxes on dividends.
S Corporations avoid double taxation by passing income directly to shareholders.
- Management and Control:
Sole Proprietorship:
Owner has full control over all business decisions.
Partnership:
General partners share management responsibilities.
The partnership agreement often outlines decision-making processes.
Corporation:
Managed by a board of directors and officers.
Shareholders typically do not participate in day-to-day operations.
- Formation and Compliance:
Sole Proprietorship:
Easiest and least expensive to establish.
Minimal regulatory requirements and paperwork.
Partnership:
Relatively easy to form, often requiring a partnership agreement.
Must register with the state and comply with state laws.
Corporation:
More complex and costly to establish.
Requires filing articles of incorporation, adopting bylaws, issuing stock, and holding regular meetings.
- Raising Capital:
Sole Proprietorship:
Limited to personal funds and loans.
Harder to attract investors due to high risk.
Partnership:
Can raise funds through partner contributions.
May also attract investors as limited partners.
Corporation:
Easier to raise capital by issuing stock.
Can attract a larger number of investors.
- Continuity and Transferability:
Sole Proprietorship:
Business continuity is tied to the owner’s lifespan.
Transfer of ownership requires selling the business assets.
Partnership:
Continuity depends on the partnership agreement.
Transfer of ownership requires agreement from all partners.
Corporation:
Perpetual existence, independent of the lifespan of owners.
Ownership can be transferred through the sale of stock.
- Regulatory Requirements:
Sole Proprietorship:
Fewer regulatory requirements.
Simple annual reporting and tax filing.
Partnership:
Moderate regulatory requirements, including partnership agreements and state registrations.
Annual informational tax filings.
Corporation:
Most regulatory requirements, including regular filings, record-keeping, and compliance with state and federal laws.
Required to hold annual meetings and keep detailed records of minutes and resolutions.
Understanding these key differences helps individuals and businesses choose the appropriate structure based on their specific needs, goals, and risk tolerance.