The definition of a business can be somewhat confusing. Simply put, a business is any entity defined as a legal entity that conducts business or acts as a commercial entity. Businesses may be either for-profit or non-profitable entities that conduct business to meet a social need or further a personal social purpose. A business may also be owned by an individual and operated for the benefit of that individual. In short, a business exists when a legal entity conducts legally authorized business transactions.
A company may be established by one or more members as a general partnership. Partnerships create limited liability for the entity that limits its losses in lawsuits but does not limit the partners’ ability to share in the business’s profits. The most familiar example of a general partnership is a corporation and its main article of business is a manufacturing facility.
In contrast, a corporation is created by an act of Congress and is considered a legal entity separate and distinct from its owners. To make a corporation, there must be at least one registered signatory and a general partnership document. In general partnerships, partners share in the advantages of the partnership without being liable for the same. But unlike a general partnership, there is no guarantee that profits are shared. A sole proprietor is only liable for its own debts.
Similarly, a sole proprietorship is not necessarily separate from its owners. A sole proprietorship can exist as a separate entity from its owners and still share profits with those owners. A sole proprietorship may be established in several ways, including by a written contract. A sole proprietorship may be a partnership that has no additional members, in which case the word “sole” is deleted from the partnership agreement.
Another distinction between a corporation and sole proprietorship is its status as a separate legal entity from its owners. A corporation is created by a specific statute and may have one or several shareholders. Limited liability is a different concept. It indicates that the corporation has separate legal bodies and management structure from its shareholders and is therefore not protected by corporate securities laws. A corporation is also distinguished from other kinds of businesses in that it is not required to distribute its profits to its shareholders.
There are two major differences between corporations and sole proprietorships. The first difference refers to the way in which the shareholders will be taxed on their dividends. The second is that corporations have limited liability, whereas sole proprietorships do not. Corporations share capital with other companies and are protected from the effects of adverse events, whereas sole proprietorships are subject to the risks associated with their own assets and equity.