Sunday, April 24, 2011

Types of Business Organizations

In introductory accounting, we learned about the 3 main types of business organization: proprietorship, partnership, and corporation.

Each of these organizations has it's own benefits and drawbacks, and before deciding how you are going to organize your business, it is helpful to review what those are.

I'll make a very quick summary of each of the business organizations...

1. Sole Proprietorship.
This is perhaps the easiest way to start a business, and usually does not require a lot of cash up front. You are the sole owner of the business and you are liable for everything that happens with the business, including debt, losses, and profits.
Many of the local mom & pop shops, such as small clothing stores, hair salons, and spas are sole proprietorships.

2. Partnerships.
A partnership is a business with more than one owner. However, all partners are responsible for everything that happens with the business (which is different from a corporation). This means that partners are not separate economic entities, and that they may have to make personal financial sacrifices to repay the debts.

The biggest advantage of a partnership is that 2 (or more) heads are better than one, so if one person is good at one thing and another person is good at the other, then the business will be much stronger than having just one sole proprietor do all the work.

3. Corporation.
In a corporation, the owners (people who invested the money) become shareholders. They are not liable for anything that happens to the business because the shareholders' personal assets are separate from that of the corporation.


Hope this was helpful,
Yana

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