THREE LEGAL FORMS OF BUSINESS ENTERPRISE
THE THREE MOST IMPORTANT LEGAL FORMS OF BUSINESS ENTERPRISE
SHARE OF STOCK
Represents partial ownership of a corporation
Ownership of X% of the stock
= Ownership of X% of the corporation
Gives you X% of the corporation’s dividends DIFFERENT TREATMENT WITH RESPECT TO
Who is liable (or responsible) for paying outstanding debts?
How are the profits taxed by the government?
Sole proprietors and partners
The business owners are personally liable for all business debts
Each partner is liable for all debts
Example: If your business borrowed, say, $1 million from a lender and your business could not repay the debt,
the lender could sue you and take ownership of everything you own (checking accounts, savings, stock
ownership, certificates of deposit, house, car, etc.)
Applies to corporate stockholders
You sue a corporation as a separate legal entity.
Personal assets of stockholders are safe.
Example: Suppose you own stock in United Airlines. Suppose United Airlines borrowed $1 billion to buy some new
planes. Suppose United Airlines was unable to repay the lenders. The lenders would sue United Airlines as a separate legal entity. The lenders could take possession of all the assets owned by United Airlines, but the lenders could NOT sue
you individually as a part owner and the lenders could NOT take possession of any of your individual assets.
BIG ADVANTAGE FOR CORPORATIONS
TAXATION OF PROFITS
SOLE PROPRIETOR AND PA