Small Business Structure in the United States

The Sole Proprietor. Most businesses are sole proprietorships -- that is, they are owned and operated by a single person. In a sole proprietorship, the owner is entirely responsible for the business's success or failure. He or she collects any profits, but if the venture loses money and the business cannot cover the loss, the owner is responsible for paying the bills -- even if doing so depletes his or her personal assets.

Sole proprietorships have certain advantages over other forms of business organization. They suit the temperament of people who like to exercise initiative and be their own bosses. They are flexible, since owners can make decisions quickly without having to consult others. By law, individual proprietors pay fewer taxes than corporations. And customers often are attracted to sole proprietorships, believing an individual who is accountable will do a good job.

This form of business organization has some disadvantages, however. A sole proprietorship legally ends when an owner dies or becomes incapacitated, although someone may inherit the assets and continue to operate the business. Also, since sole proprietorships generally are dependent on the amount of money their owners can save or borrow, they usually lack the resources to develop into large-scale enterprises.

The Business Partnership. One way to start or expand a venture is to create a partnership with two or more co-owners. Partnerships enable entrepreneurs to pool their talents; one partner may be qualified in production, while another may excel at marketing, for instance. Partnerships are exempt from most reporting requirements the government imposes on corporations, and they are taxed favorably compared with corporations. Partners pay taxes on their personal share of earnings, but their businesses are not taxed.

States regulate the rights and duties of partnerships. Co-owners generally sign legal agreements specifying each partner's duties. Partnership agreements also may provide for "silent partners," who invest money in a business but do not take part in its management. A major disadvantage of partnerships is that each member is liable for all of a partnership's debts, and the action of any partner legally binds all the others. If one partner squanders money from the business, for instance, the others must share in paying the debt. Another major disadvantage can arise if partners have serious and constant disagreements.

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This article is adapted from the book "Outline of the U.S. Economy" by Conte and Carr and has been adapted with permission from the U.S. Department of State.