Corporations

Corporations do not represent the only, or necessarily the best, type of business. Several other forms of business offer varying degrees of organizational, financial, and tax benefits and drawbacks. The selection of a particular form depends upon the investors' or owners' objectives and preferences, and upon the type of business to be conducted.

A partnership is the simplest business organization involving more than one person. It is an association of two or more people to carry on business as co-owners, with shared rights to manage and to gain profits and with shared personal liability for business debts. A sole proprietorship is more or less a one-person partnership. It is a business owned by one person, who alone manages its operation and takes its profits and is personally liable for all of its debts. A limited partnership is a partnership with two or more general partners, who manage the business and have personal and unlimited liability for its debts, and one or more limited partners, who have almost no management powers and whose liability is limited to the amount of their investment. In a LIMITED LIABILITY COMPANY, the limited liability of a limited partnership is combined with the tax treatment of a partnership, and all partners have limited liability and the authority to manage. This is a relatively new business form.

A corporation thus provides limited liability for shareholders, unlike a partnership, a sole proprietorship, or a limited partnership, each of which exposes owners to unlimited liability. A corporation is taxed like a separate entity on earnings, out of which the corporation pays dividends, which are then taxed (again) to the shareholders; this is considered double taxation. Partnerships and limited partnerships are not taxed as separate entities, and income or losses are allocated to the partners, who are directly taxed; this "flow-through" or "pass-through" taxation allocates income or losses only once. Corporations centralize management in the directors and officers, whereas partnerships divide management among all partners or general partners. Corporations can continue indefinitely despite the death or withdrawal of a shareholder; partnerships and limited partnerships, however, dissolve with the death or withdrawal of a partner. Shareholders in a publicly held corporation generally can sell or transfer their stock without limitation. Holders of interest in a partnership or limited partnership, however, can convey their interest only if the other partners approve. Corporations must abide by significant formalities and must cope with a great volume of paperwork; partnerships and limited partnerships face few formalities and few limitations in operating their business.