Forms of Business Organization

A sole proprietorship is a business owned by one person. It is the simplest and cheapest form to start — many small shops, tradespeople, and freelancers operate this way. The catch is unlimited liability: the proprietor has unlimited personal responsibility for the debts and legal obligations of the business. If the business cannot pay a supplier, the supplier can go after the owner's personal house or car, not just the business's assets.

A partnership is a business owned by two or more people. In a general partnership, all partners have unlimited liability — each partner can be held personally responsible for the debts of the whole business, even debts another partner created. A limited partnership has two types of partners: general partners, who run the business and carry unlimited liability, and limited partners, who only risk the money they invested and take no part in day-to-day management.

A corporation is a form of business ownership that is a separate legal entity — legally, it is treated almost like a person, distinct from its owners (shareholders). Because the corporation itself owns the debts, shareholders normally have limited liability: they can lose the money they invested in shares, but creditors cannot come after their personal homes. A public corporation is listed on a stock exchange and is accountable to the public, meaning anyone can buy its shares and it must publish detailed financial reports. A private corporation is an incorporated business whose shares are not publicly traded and are held by a small number of shareholders — it does not have to publish its statements for the world to see. A corporation is run day to day by managers but is legally overseen by a board of directors, a group of persons, elected by the shareholders, who are responsible for the operation of the corporation.

Not every organization exists to make its owners richer. A non-profit organization uses any surplus of revenue over expenses to further its mission (a charity, a community centre, a sports league) instead of paying it out to owners. Credit unions are a well-known example: non-profit organizations similar to a bank that are operated by, and for the benefit of, their members. A co-operative is owned and controlled by the people who use its services — members typically get one vote each, regardless of how much they've invested, and profits are returned to members based on how much they used the co-op rather than how many shares they hold.