A sole proprietorship is a business owned and usually operated by a single individual.

The sole proprietorship is a common form of business ownership because it is the easiest to establish, but there are both strengths and weaknesses inherent in this business form.

The advantage of establishing a business as a sole proprietorship is that there are no formal, legal requirements for starting the business, and the revenues and expenses are reported directly on the business owner’s personal income tax return.

The primary disadvantage of a sole proprietorship is that the owner’s personal and business assets are at risk in the event of a business catastrophe.

A partnership is a business structure that is easy to establish and has no formal, legal requirements.

In a partnership, two or more individuals share aspects of the business, including its financial management and sales and marketing responsibilities. Income and expenses flow directly through each partner’s individual tax return.

People entering into a partnership should create a partnership agreement, which is a formal document that outlines the responsibilities of each partner and how the business’s profits will be divided and disputes among the partners settled.

Problems can occur when partners do not agree on the nature of the business or have different work ethics.

Partners’ personal and business assets are at risk, with each partner being solely liable for any part of the business. Responsibility is not limited to each partner’s financial contribution to the business.

A general partnership is an arrangement in which all partners have equal liability. In a limited partnership, some partners do not participate in the daily operations of the business, and their liability is limited to the amount of capital they contributed to the business.

A limited liability partnership (LLP) protects the partners from any debt or liability incurred by the business as well as each partner from the liability of another partner. A partner in an LLP is only personally liable for his or her own negligence.

Corporations are businesses structured as separate legal entities. Corporations are structured with different levels of managers, including shareholders, board of directors, and corporate officers, such as the chief executive officer (CEO), the chief financial officer (CFO), the chief operating officer (COO), and first-line managers.

Corporations differ from sole proprietorships and partnerships in the following ways:

• Corporations are difficult to set up.

• Corporations require much ongoing paperwork, including annual reports, corporate minutes, and formal financial records.

• Corporations must file separate tax returns.

• Corporations can sue and be sued.

• Corporations protect an owner’s personal assets.

Both S corporations and C corporations offer the protection of limited liability, but S corporations allow their shareholders to flow the corporate revenues and expenses through their personal tax returns so they don’t face double taxation.

S corporations face certain restrictions, including having no more than 100 shareholders, requiring shareholders to be residents of the United States, allowing for the issuance of only one class of stock, and basing profits and losses on the proportional interest of each shareholder.

The corporate structure a limited liability company (LLC) offers the protection of limited liability like an S corporation does. LLCs differ from S corporations because they can have unlimited members, they must dissolve when any member leaves, and profits do not have to be distributed in direct proportion to a member’s financial contribution.

Not-for-profit organizations are corporations whose purpose is to serve the public interest rather than to seek to make a profit. Not-for-profit organizations are tax exempt, and donors to the organization can deduct their contributions on their tax returns.

Cooperatives are businesses that are owned not by outside investors but are governed by members who use its products and services.

Cooperatives are motivated to provide services or goods to people with common interests or needs.

All profits generated by the cooperative are returned to the members in direct proportion to their share of ownership.

Cooperatives use the benefit of the power of their groups’ to negotiate within the marketplace.

Firms sometimes use mergers and acquisitions to legally combine their companies for the purposes of achieving synergy and economies of scale, expanding their product lines and geographic areas they serve, or gaining a competitive advantage.

An acquisition occurs when one company buys another company outright. The purchased company ceases to exist and starts to operate under the buying company’s name and management. Acquisitions can be friendly (mutually agreed on) or unfriendly (one company buys the other against the wishes of the management and/or the owners).

A merger occurs when two companies of similar size mutually agree to combine to form a new company. Some types of mergers are as follows:

• Horizontal mergers: Two companies that share the same product lines and are in direct competition with each other merge.

• Vertical merger: Two companies that have a company/customer relationship or a company/supplier relationship merge.

• Product extension merger: Two companies selling different but related products in the same market merge.

• Market extension merger: Two companies that sell the same products in different markets merge.

• Conglomeration: Two companies that have no common business areas merge to obtain diversification.