The advantages of sole proprietorship as a business form
include: ease of establishment, no required business taxes, and sole control of business
decision-making. Sole proprietorships are easier to establish than a partnership, which
requires legal partnership agreements to be drawn up, or a corporation, which requires
an expensive and lengthy application for a government charter of incorportation. Sole
proprietors only pay personal income taxes on the profits of the business, the business
itself is not responsible for paying any taxes. Finally, the sole proprietor makes all
the business decisions for himself/herself, without potential conflict with a partner or
board of directors.
The chief advantages of a partnership
include: ease of raising capital, the ability to attract quality employees, and no
required business taxes. It is easier for a partnership to raise financial capital
because partners represent a smaller risk than a sole proprietor. If one partner
defaults on a business loan, the bank can still collect from the other partner(s). The
possibility of "making partner," or being offered part ownership in the business as a
reward for hard work, is an incentive that partnership can offer that sole
proprietorships often cannot. For this reason, partnerships can often attract more
quality employess. Finally, like sole proprietorships, partners only have to pay
personal income taxes on their share of the profits. The business is not liable for
business taxes as a corporation would be.
A limited
liability company (LLC) is a hybrid of a sole proprietorship or partnership, and a
corporation. While enjoying the advantage of not having to pay business taxes like a
corporation, the owners of an LLC are not liable for "the acts and debts" of the
business. This addresses a major disadvantage of sole proprietorships and partnerships,
unlimited liabilty, which means that the owners are personally liable for judgements
against the business.
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