Related Terms:

• Stock: The ownership or equity of a corporation divided into shares.

• Equity: The collection of all the outstanding shares of a corporation.

• Dividend payments: Payments made at all the discretion of the corporation to its equity holders.

• Board of directors: A group of people elected by the shareholders who have the ultimate decision making authority in the corporation.

Corporations

Features of Corporations:

• Corporations have unlimited life as it is owned by stockholders and managed by employees, the death of a shareholder or an inefficient employee does not harm the continuous life of a corporation.
• Each and every shareholder has limited liability to the amount each has invested in the corporation.
• It is considered as a separate legal entity, conducting business in its own name.
• A corporation can easily raise its capital by selling stock or bonds.

Advantages of corporations are:

• Unlimited Life: The life of a corporation is endless as it is not affected by the death of a shareholder or an inefficient employee.

• Easy to raise capital: A corporation can easily raise capital by selling bonds and shares.

• Transfer of ownership: As the ownership is represented by number of shareholders, the transfer of ownership becomes very easy.

Disadvantages of corporations are:

• Difficult to form: A corporation is difficult to form as the cost for setting up a corporation is high and also it needs registration with the central regulatory authority.

• Double Taxation: In case of corporations there is double taxation. First of all the corporate income is taxed at a flat rate and then the dividends paid to the shareholders is taxed.

• Conflict: There may be a possibility of conflict between the shareholders and the directors.

Partnership

Features of Partnership:

• There are two or more than two owners in a partnership firm.
• There is unlimited liability for each partner.
• Partnership ends on death or withdrawal of any partner.
• There is a restriction on transfer of shares.
• Partnership is formed by an oral or written agreement between the partners.

Advantages of partnership:

• Capital: The advantages of the partnership in business is they can pay the initial capital required to start up the business. This means that the more the partners are the more money is invested in business which in turns means more chances of profit in the future which obviously will be shared equally among the partners.

• Flexibility: Partnership is more flexible than companies in terms of management and they are less strictly bound by laws which refer to their formation hence they are easier to form. They are also the sole investors who run the company and stake holders cant interfere in their business

• Shared responsibility: Partners have the freedom to choose their responsibilities according to their skill set rather than sharing each task of management equally among the partners. This yields the most profit. So the partner that is best with numbers may take the accounting positions of the business while the other who is  good with sales may take the leading salesman position in the business.

Disadvantages of partnership:

• Disagreement: The main disadvantage of partnership is the possibility of disagreements between the partners as not all humans have same ideas and goals so the difference in opinions can lead to disagreements and in worst case scenario the dissolving of the business. That is why it is strongly advised to create a deed before starting a business stating the terms in case there is a disagreement and also the repercussions in case the partnership is abolished.

•   Profit Sharing: As their is an advantage in partnership that everyone shares the profit equally but there is also a drawback of this sharing as some of the partners may not put in the same efforts as the rest and may be earning profits by not even putting in any effort.

• Agreement: In  partnership it is a must that all partners should agree on the same point. So in some cases there is less freedom with respect to management.

Features of Sole Proprietorship:

• It is easy to form.
• There is no separation between the owner and the firm.
• The owner faces unlimited personal liability.
• This type of business has a limited life.
• More difficult to transfer.

Advantages of Sole Proprietorship:

1. Ease of formation: Sole proprietorship is easily formed as compared to other forms of business, Starting a sole business is less complicated and much cheaper, The proprietorship can be named after the name of the owner.
2. Decision making: As there is only a single owner, all the important decisions regarding the firm lies in the hands of the owner.
3. Employment: Sole proprietorship can hire employees. This results in many kinds of benefits related to job creation.

Disadvantages of Sole proprietorship:

1. Liability: This is the biggest drawback of sole proprietorship. The owner is directly responsible for any losses, debts or violations coming from the business. The owner can be sued in case an employee gets committed in any unlawful act.
2. Difficulty in raising funds: The owner usually provides the initial funds so, it becomes difficult to generate capital. Sole proprietorship does not issue stocks or any other money generating investments like other types of firms.
3. Lack of continuity: The business does not continue if the owner becomes deceased or incapacitated.

Personal Financial Tips

Why one should study Finance?

• In order to take charge of personal finances - for yourself or for clients
• Investing - for yourself or as a career
• For decision making as a financial manager
• For making important decisions in all areas of business

Talking about finance there are 3 kinds of business firms

• Sole proprietorship
• Partnerships 
• Corporations