[TYPING]
[MUSIC PLAYING]
NARRATOR: From an accounting perspective, the three most comma classifications of businesses are the sole proprietorship, the partnership, and the corporation. Let's start with the sole proprietorship. A sole proprietorship is where one person starts a business and could be as simple as opening a lemonade stand in your neighborhood. It's easy to set up. You have full control over it, and there aren't many tax requirements.
However, there are some drawbacks. In a sole proprietorship, you have unlimited liability. This means that if your business is unable to meet financial obligations, a creditor like the bank can come after your personal assets, such as your house or even your car. The primary way you'd be financing your business is through bank loans or personal investments, and the life of your business is only as long as your own.
Now, let's say you decide to open a lemonade stand, but this time, with a few friends. This would be considered a partnership. A partnership is quite similar in the sense that it's also very easy to set up and has no special tax requirements. There is shared control of the business, and you have access to a lot more resources. One of the biggest consequences of a partnership, however, is that you are liable for any of your partners' debts or bad decisions.
Finally, the third type of business organization is a corporation. Unlike the first two, a corporation is a separate legal entity. Think of it as its own person. It is much harder to set up and has its own tax requirements. The benefits of incorporating your business can be quite rewarding, though. Through stockholders, you can raise a large amount of capital. You are not personally liable for the business's debts. And the life of the business is infinite and doesn't parallel the life of any individual.
You are most likely interacting with all three of these business organizations on a daily basis without even noticing. The best business organization for any business depends heavily on the long-term goals of the business, but is an important distinction to make.
[MUSIC PLAYING]