One of the most basic decisions that all businesses confront is how to choose a legal form of organisation. This decision has important financial implications because how a business is organised legally, influences the risks that the firm’s owners must bear, how the firm can raise money, and how the firm’s profits will be taxed. “The three most common legal forms of business organisation are the sole proprietorship, the partnership, and the company. More businesses are organised as sole proprietorships than any other legal form. However, the largest businesses are almost always organised as companies. Even so, each type of organisation has its advantages and disadvantages.
Sole proprietorships
A sole proprietorship is a business owned by one person who operates it for his/her profit. The typical sole proprietorship is small, such as a bike shop, personal trainer, or plumber – most sole proprietorships operating in the wholesale, retail, service, and construction industries.
Typically, the owner (proprietor), along with a few employees, operates the proprietorship. The proprietor raises capital from personal resources or by borrowing, and he/she is responsible for all business decisions. As a result, this form of organisation appeals to entrepreneurs who enjoy working independently. A major drawback to the sole proprietorship is unlimited liability, which means that liabilities of the business are the entrepreneur’s responsibility, and creditors can make claims against the entrepreneur’s assets if the business fails to pay its debts.