Each and every structure requires a foundation. For a business, it usually turns on legal foundation, meaning the legal form selected to establish and operate the business. Some common types of businesses include sole proprietorships, partnerships, joint ventures and corporations.
Sole Proprietorship
Operating a sole proprietorship is the most basic and least expensive way of starting a business. No separate legal entity is created and there is only one owner – the individual operating the business. Due to this, the owner is fully liable for all debts and liabilities of the business. All benefits flowing from the business, such as income and assets, accrue exclusively to the owner, and correspondingly, all obligations including losses and contractual and tortious liability associated with the business are also the owner’s responsibility. Although the term "sole proprietorship" refers to an individual carrying on business for himself or herself, a sole proprietor will often carry on business under a trade name. The use of a trade name does not limit the liability of the sole proprietor. It should be noted that once there is more than one business owner, the business automatically transitions into a partnership.
Partnership
A partnership consists of a relationship between two or more persons carrying on business in common with a view to profit. The members of the partnership are called partners. A partnership is similar to a sole proprietorship in that it is relatively inexpensive to establish, there are few legal formalities required to create it, and the partners carry on the business themselves directly, since the partnership is not a separate legal entity.
Joint Venture
There is no precise legal definition for a joint venture. A joint venture is normally used to describe a form of business arrangement under which two or more persons combine their resources for a specified venture. These resources usually include money, property, effort, knowledge and skills. Whatever the relationship among them, the co-venturers should have a written agreement setting out the rules by which the venture will be governed. Some advantages to joint ventures include: flexibility in formation and operation; income or loss is calculated at the owner’s level (as a joint venture does not file a separate tax return); and flexibility for profit-loss offsets.
Corporation
A corporation is the most common form of business organization. A corporation is a legal entity separate from its owners (those being the shareholders) and can own property, carry on business, possess rights, and incur liabilities. This is the structure startups use. A major function of corporations is the administration of assets and liabilities. Although the shareholders own the corporation through their respective ownership of shares, they do not own the property belonging to the corporation, and the rights and liabilities of the corporation are not the rights and liabilities of the shareholders (i.e. the corporation being a separate legal personality). Generally, but not in all cases, shareholders of the corporation are not personally liable for the debts and liabilities of the corporation – their liability is usually limited to the value of the assets they have transferred to the corporation (in the form of money, property, or past services) in exchange for shares.
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This publication is not intended to constitute legal advice. No one should act on it or refrain from acting on it without consulting with a lawyer. Jaswal Law would be pleased to provide additional details or advice about specific situations if desired. No part of this publication may be reproduced without the prior written permission of Jaswal Law.