Topics, 100 Accounting Resources, 100 Reading List
There are many useful ways to separate and categorize business entities, one being by business form, by type of business structure; another being by a business’s relation to inventory, whether the business is selling inventory and whether they produce the inventory they are selling.
The three broad categories of business structure are a sole proprietorship, partnership, and corporation.
A sole proprietorship is a business owned by one person and is the most common type of business in the United States. The benefits of a sole proprietorship are that they are easy and inexpensive to form. An individual who starts acting as a business, generating revenue, is a sole proprietor by default unless they create some other type of organizations. The income from a sole proprietor is taxable but will be reported on the individual tax return, on Form 1040 supported by a supplemental Schedule C.
The disadvantages of a sole proprietor include limited personal liability protection and limited capital generation capability when compared to other types of organizations.
A partnership is similar to a sole proprietor except that the business now has two or more partners. A partnership has the same benefit of easy formation and the same drawbacks of liability exposure and limited capital generation.
A corporation is a separate legal entity. Corporations are less common than the sole proprietorship but generate the largest percentage of total U.S. revenue. The benefits of a corporation include that they provide liability protection through being a separate legal entity, the theory being that the assets of the corporation are liable but personal assets are not, personal assets having more protection when compared to other types of organizations. The disadvantages of a corporation include that they are more costly to form, more complicated to maintain, and can result in double taxation.
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