Of the three business entity forms(proprietorship, partnership, or corporation), what are most new small businesses organized as in regards to liability and why?
Most new small businesses are organized as a proprietorship or a corporation in regards to liability.
To understand why these entities are popular choices, let's first explain the liability aspect of each form:
1. Proprietorship: A proprietorship is the simplest form of business entity where the business is owned and operated by a single individual. In this case, there is no legal distinction between the business and the owner. From a liability perspective, the owner is personally responsible for the debts and obligations of the business. This means that if the business fails or encounters legal issues, the owner's personal assets could be at risk.
2. Partnership: A partnership is a business owned and operated by two or more individuals. Similarly to a proprietorship, there is no separate legal identity for the partnership, and each partner is personally liable for the obligations and debts of the business. This means that if one partner is unable to cover their share of the business's liabilities, the other partners may also be held responsible.
3. Corporation: A corporation is a legal entity that is separate from its owners. It is formed by filing articles of incorporation with the state. The corporation is responsible for its own debts and obligations, and the owners (shareholders) have limited liability, meaning their personal assets are generally protected. However, it's worth mentioning that shareholders can lose their investment in the corporation if it fails.
Considering the liability aspect, most new small businesses opt for a corporation because of the limited liability protection it offers. This means that if the business encounters financial or legal troubles, the personal assets of the owners are not at risk. Small businesses, especially those that involve higher risk or potential for legal issues, often choose a corporate structure to protect the owners' personal assets. It provides a level of peace of mind and can make it easier to attract investors or secure financing. However, it's important to note that selecting a specific business entity should be based on several factors, including the nature of the business, tax implications, management structure, and long-term goals. Consulting with a business attorney or accountant is recommended to make an informed decision.