Of course, it's true that small businesses often fail. Often, failure of a small business venture turns out to be a valuable learning experience for the entrepreneur, who may be more successful the second or third time. Unsuccessful attempts to start a business become part of the larger process of sorting out the market and making it more efficient. Small businesses often grow into, large ones, adding to the economic stability of the nation.
Sole Proprietorship
The legal form of business organization that has only one owner is known as a sole proprietorship. Many businesses are sole proprietorships, firms owned and operated by a single person.
When a person decides to open an independent business, that person is then entirely responsible for its success or failure.
Any profits go to the owner; any losses are his or her responsibility as well. If the losses prove to be greater than the investment, the individual is responsible for paying them, even if this depletes all personal assets. One of the advantages of a sole proprietorship is that an owner can make decisions quickly and decisively without having to consult others. And an individual proprietor, by law, pays fewer taxes and at lower rates than does a corporation.
There are disadvantages to this form of business organization, however. A sole proprietorship ends with the incapacity or death of the owner. The assets can be inherited by a person who may even become the operator, but legally the business dies with its owner. Also, since it is dependent upon the amount of money the owner has saved or can borrow, usually it does not develop into a large-scale enterprise.
In spite of its limitations, the sole proprietorship is well adapted to many kinds of small businesses and suits the temperament of many persons who like to exercise initiative and be their own bosses.
Partnership
A partnership is an association of two or more persons to carry on a business for profit. When the owners of the partnership have unlimited liability they are called general partners. If partners have limited liability they are called «limited partners». There may be a silent partner as well - a person who is known to the public as a member of the firm but without authority in management. The reverse of the silent partner is the secret partner - a person who takes part in management but who is not known to the public.
Any business may have the form of the partnership, for example, in such professional fields as medicine, law, accounting, insurance and stockbrokerage. Limited partnerships are a common form of ownership in real estate, oil prospecting, quarrying industries, etc.
Partnerships have more advantages than sole proprietorship if one needs a big capital or diversified management. Like sole proprietorship they are easy to form and often get tax benefits from the government.
Partnerships have certain disadvantages too. One is unlimited liability. It means that each partner is responsible for all debts and is legally responsible for the whole business. Another disadvantage is that partners may disagree with each other.
Corporation
A business corporation is an institution established for the purpose of making profit. It is operated by individuals. Their shares of ownership are represented by stock certificates. A person who owns a stock certificate is called a stock-holder.
There are several advantages of the corporate form of ownership. The first is the ability to attract financial resources. The next advantage is that a corporation attracts a large amount of capital it can invest it in plants, equipment and research. And the third advantage is that a corporation can offer higher salaries and thus attract talented managers and specialists.
The privately owned business corporation is one type of corporation. There are some other types too. Educational, religious, charitable institutions can also incorporate. Usually such corporation does not issue stock and is nonprofit. If there is a profit it is reinvested in the institution rather than distributed to private stockholders.
In some western countries, cities, states, federal government and special agencies can establish governmental corporations. A few examples of these governmental corporations are state hospitals and city owned utilities. Governmental corporations are non-profit as a rule and usually they do not issue stock certificates.