1.2 Types of Business Ownership

Sole Proprietorship & Partnership

A sole proprietorship is owned by one person, is easy and cheap to start, gives full control, but has unlimited liability (owner's personal assets at risk) and limited access to capital. A partnership has two or more owners sharing profits, skills, and liability. General partners share unlimited liability; limited partners risk only their investment.

Corporations

A corporation is a separate legal entity owned by shareholders, offering limited liability — owners' personal assets are protected. It's costlier and more complex to form, faces double taxation (corporate profits taxed, then dividends taxed again), but can raise capital easily by selling stock and has unlimited life.

S Corporations & LLCs

An S corporation avoids double taxation by passing income directly to shareholders' personal tax returns while still offering limited liability, but has restrictions (e.g., limited number of shareholders). An LLC (Limited Liability Company) blends partnership flexibility with corporate limited liability, offering pass-through taxation and less paperwork than a corporation.

Key terms

Sole Proprietorship

Business owned by one person; easy to start, full control, but unlimited liability.

Partnership

Business owned by two or more people sharing profits and liability; general partners have unlimited liability.

Corporation

Separate legal entity owned by shareholders with limited liability, but subject to double taxation.

S Corporation

Corporation type that avoids double taxation via pass-through income, with restrictions on shareholders.

LLC (Limited Liability Company)

Combines partnership flexibility and pass-through taxation with corporate-style limited liability.

Try an AP-style question

A key disadvantage of a sole proprietorship is…

1. complex legal paperwork
2. double taxation of profits
3. unlimited personal liability
4. shared control with partners