Key Takeaways

  • A sole proprietorship is the simplest business enterprise, easy to start but exposing owners to unlimited personal liability.
  • Partnerships allow shared management and resources, with variations in liability and control.
  • Corporations are the most common type of formal business enterprise, offering limited liability, centralized management, and perpetual existence.
  • Enterprises are often large-scale corporations or organizations with multiple departments, complex structures, and global operations.
  • Choosing the right structure impacts taxation, liability, and growth opportunities.

What is the most common type of corporation available to business owners? The most common business entities include:

  • Sole Proprietorships or "DBA"
  • Partnerships
  • Limited Liability Companies (LLC)
  • Corporations
  • Cooperatives
  • Professional Entities

Identifying the type of business entity to form is one of the first and most important decisions to make when establishing a business. The business structure you choose will affect the company's legal and tax status.

Sole Proprietorships

A sole proprietorship, also called a DBA (abbreviation of "doing business as") is the most basic and cheapest business structure an entrepreneur can choose when forming an enterprise. It's unincorporated and owned and operated by a single person. There is no distinction between the owner and the business. All the business profits belong to the owner. He or she is also responsible for the company's losses, debts, and obligations.

Because there is no distinction between the sole proprietorship and its owner, the business is not taxed separately. Rather, the sole proprietor files the company's profits or losses with his or her tax returns. If the sole proprietorship intends to operate under an assumed name, then it must file an assumed name certificate with the county clerk of the county where the physical business office is located. If the business has no premises, then it should file an assumed name certificate in all the counties where it operates under the assumed name.

One disadvantage of a sole proprietorship is that it exposes the owner to the company's liabilities. The sole proprietor's assets can be used to settle the company's debts and obligations. Further, sole proprietorships can have difficulty raising capital, as most investors want to become part owners of a business if they invest in it.

Advantages and Disadvantages of Sole Proprietorships

Sole proprietorships are popular because they are inexpensive to establish and give owners full control. However, their drawbacks go beyond personal liability. Raising capital can be difficult because banks and investors often prefer more structured business enterprises. Growth is also limited, as the survival of the business depends entirely on the owner. Many sole proprietorships eventually evolve into LLCs or corporations to access better financing and limit liability.

Partnerships

A partnership is a structure in which two or more people decide to form a business. Typically, each partner invests their money, skills, property, and labor into the business and receives their share of the company's profits or losses. There are three primary forms of partnerships:

  • General Partnerships
  • Limited Partnerships
  • Limited Liability Partnerships

General Partnerships: In this type of partnership, the partners share managerial duties and liabilities equally. Additionally, partners are liable for their actions. The actions of other partners and the personal assets of all partners can be used to settle the partnership's obligations and debts.

Limited Partnerships: Here, the partners' liability is limited to their investment in the company, but this also limits their control of the company. A limited partnership requires a minimum of one general partner with unlimited liability.

Limited Liability Partnerships: These have the same structure as general partnerships but offer partners protection against the partnership's liabilities. Its name must include "Registered Limited Liability Company" or the abbreviation "LLP."

A partnership business does not pay income tax, but it must file an annual information return detailing the income, profits, losses, deductions, and other expenses from its revenue. The IRS treats partnerships as pass-through entities, meaning they pass profits and losses to partners who file these along with their income tax returns.

Choosing Between Partnership Types

When deciding on a partnership structure, entrepreneurs should carefully weigh liability and management needs:

  • General Partnerships suit small ventures where partners actively manage daily operations.
  • Limited Partnerships are ideal for ventures seeking investors who want limited liability without daily involvement.
  • Limited Liability Partnerships (LLPs) are commonly used by professionals such as lawyers and accountants, as they protect individual partners from personal liability caused by another partner’s negligence.

Each form of partnership is considered a business enterprise, but the choice depends on how much risk and control the partners are willing to share.

Corporations

A corporation is a business structure that exists as an independent legal entity separate from its owners, who are also known as shareholders. Because a corporation is an independent legal entity, it is legally responsible for its debts and obligations, and it can sue and be sued. Shareholders choose individuals to serve on the corporation's board of directors. The board of directors:

  • Makes strategic decisions.
  • Formulates and executes policies.
  • Appoints the corporation's officers, including the president, treasurer, and secretary that run the company on a daily basis.

A corporation is a legal entity that offers limited liability, centralized management, continuity, and flexible transfer of ownership. Corporations must maintain certain corporate formalities, such as:

  • Maintaining an office and registered agent in the state of incorporation.
  • Drafting of bylaws.
  • Issuing stock certificates to shareholders.
  • Holding at least one shareholder and directors meeting each year.
  • Keeping minutes of shareholders and directors meetings.
  • Filing the corporation's tax returns.

Why Corporations Are the Most Common Business Enterprise

Corporations are often the most common type of business enterprise because they provide:

  • Limited liability for shareholders.
  • Access to capital through stock issuance.
  • Perpetual existence regardless of changes in ownership.
  • Credibility with lenders, investors, and partners.

Large enterprises typically adopt the corporate structure since it allows them to manage multiple divisions, operate internationally, and attract significant investment.

Understanding Enterprises in the Corporate Context

The term enterprise is often used interchangeably with business, but it generally refers to larger, more complex organizations. An enterprise might include several departments—finance, legal, marketing, and research—operating under one corporate umbrella. Enterprises also often:

  • Serve multiple markets (B2B and B2C).
  • Employ a large workforce.
  • Operate globally with significant resources.

In this sense, every enterprise is a business, but not every business qualifies as an enterprise.

Other Types of Business Enterprises

In addition to corporations, sole proprietorships, and partnerships, business owners can choose from other recognized structures:

  • Limited Liability Company (LLC): Blends corporate liability protection with pass-through taxation.
  • Cooperatives: Owned by members who share profits and decision-making.
  • Professional Entities: Formed by licensed professionals such as doctors or lawyers for liability and regulatory compliance.

These options allow entrepreneurs to select the business enterprise best aligned with their goals, industry, and risk tolerance.

Frequently Asked Questions

  1. What is the most common type of business enterprise?
    The corporation is the most common type because it offers limited liability, access to capital, and perpetual existence.
  2. How is an enterprise different from a business?
    A business is any organized activity to make a profit, while an enterprise usually refers to large-scale, complex organizations with multiple departments.
  3. Why do entrepreneurs shift from sole proprietorships to corporations?
    They often do so to reduce personal liability, raise capital, and increase credibility with lenders and investors.
  4. Are LLCs considered business enterprises?
    Yes, LLCs are a form of business enterprise combining features of corporations, partnerships, and sole proprietorships.
  5. Which business enterprise is best for professionals like doctors or lawyers?
    Many professionals choose LLPs or professional corporations to gain liability protection while meeting licensing requirements.

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