In the today’s corporate world there are several types of business organizations, and these include sole proprietorships and corporations. If you want to start a sole proprietorship or corporation, there are some things you have to know; otherwise, you may be confused as to which one is better and end up making the wrong choice. This article highlights similarities and differences between the two and will help you to make a better choice.
Sole proprietorship is a form of business in which you start a business as an individual. The income or loss you make from the business is enjoyed alone by you, and is reported as individual income in tax returns. It is a simple way of doing business, but is sometimes expensive because of taxes and the personal responsibilities to business liability.
In a Corporation the business is separate from its owners. The business is a virtual person who has his/her own responsibility to tax and business liabilities. A corporation can sue or be sued. Shareholders have limited liability in the business. It is taxed twice – that is, when it makes a profit, and when it pays dividends to shareholders.
|Full responsibility for tax and liabilities||Shareholders have limited liability|
|Access to limited capital||Access to unlimited capital|
|Does not have a continuous existence||Continuous existence|
|Managed by owner||Managed by directors|
|One and the same with the owner||A corporation is a separate legal entity|
|Less regulated||More regulated|
The difference between these two forms of business lies in the capital available to them and the liability of its owners to business debts. Other factors such as regulation, management, and continuity of the business relative to the owners’ existence are also important.
A sole proprietorship has only the owner to raise capital, enjoy profits or losses, pay taxes and pay any debts the business owes people. It is easy to start a sole proprietorship business since it requires little capital and has the lowest regulatory burden. Here, the owner’s personal assets are at stake for paying business debts. Since you are one and the same, your financial capability is reflected on how much capital the business has, which is in effect limited. You are in full control of all business decisions; however, you may face difficulties raising enough capital and lack continuity whenever you are absent.
A corporation, on the other hand, is a legal ‘person’ that is separate from its owners. It can therefore sue or be sued in court. The owners of the corporation do not risk their personal assets; only the corporation’s assets are at risk of liabilities. The corporation pays taxes on its own and can easily draw capital from a number of sources, such as selling shares to the public. It has a perpetual life, meaning that it cannot cease to exist even if its members die. However, a corporation is more regulated than a sole proprietorship, is expensive to start, and has to keep elaborate records of its activities. Unlike a sole proprietorship that is managed by the owner, corporations are managed by directors. Corporations are faced with the risk of conflict of interest since their directors may have conflicts with shareholders, especially on decisions that affect shareholders’ dividends.
Here is a video that explains the different forms of business, and advice on the best decisions that you should make in order to maximize on profits while limiting risks: