Forms of Business Ownership

Why This Matters

In a capitalist economy, the structure you choose for a business isn't just paperwork—it fundamentally shapes how that business operates, grows, and survives. You're being tested on how different ownership structures affect liability, taxation, decision-making, and capital formation. These concepts connect directly to broader themes like market competition, risk management, and the relationship between individual entrepreneurs and the broader economy.

Don't just memorize the names of business structures. Know why an entrepreneur would choose one form over another, how liability protection encourages risk-taking and investment, and what trade-offs each structure involves. When you see an FRQ about business decisions or market behavior, the ownership structure is often the hidden variable that explains everything else.

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Structures with Unlimited Personal Liability

These ownership forms offer simplicity and direct control, but owners put their personal assets on the line. The absence of legal separation between owner and business means creditors can pursue personal property to satisfy business debts.

Sole Proprietorship

• Single owner with complete control—the simplest structure to establish with minimal paperwork and regulatory requirements
• All profits go directly to the owner, but so do all losses and legal obligations
• Unlimited personal liability means the owner's home, savings, and personal assets can be seized to pay business debts

Partnership

• Two or more individuals share ownership according to terms specified in a partnership agreement
• Joint and several liability exposes each partner to responsibility for the entire debt, not just their share
• Flexible profit-sharing arrangements allow partners to divide earnings based on contribution, expertise, or negotiated terms

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Structures with Limited Liability Protection

These forms create a legal wall between business obligations and personal assets. Limited liability encourages entrepreneurship and investment by capping potential losses at the amount invested in the business.

Corporation

• Separate legal entity distinct from its owners, capable of entering contracts, owning property, and being sued independently
• Limited liability protection shields shareholders' personal assets from business debts and lawsuits
• Subject to extensive regulations including formal governance requirements, reporting obligations, and state filing fees

Limited Liability Company (LLC)

• Hybrid structure combining corporate liability protection with partnership-style tax treatment
• Pass-through taxation allows profits to flow directly to members' personal returns, avoiding entity-level taxes
• Flexible management structure permits member-managed or manager-managed arrangements without corporate formalities

Limited Partnership

• Two classes of partners—general partners manage operations with unlimited liability; limited partners invest passively with liability capped at their contribution
• Commonly used for investment ventures like real estate or private equity where passive investors want exposure without management responsibility
• Limited partners sacrifice control for protection—participating in daily operations can void their liability shield

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Corporate Tax Structures

The distinction between these corporate forms centers on how profits are taxed—either at the entity level, the shareholder level, or both.

C Corporation

• Double taxation occurs when the corporation pays taxes on profits, then shareholders pay again on dividends received
• Unlimited shareholders permitted with no restrictions on ownership type, enabling massive capital raises through public stock offerings
• Preferred structure for large enterprises and companies planning IPOs due to flexibility in ownership and stock classes

S Corporation

• Pass-through taxation eliminates double taxation by flowing profits directly to shareholders' personal returns
• Strict eligibility requirements—limited to 100 shareholders who must be U.S. citizens or resident individuals (no foreign or corporate owners)
• Combines liability protection with tax efficiency, making it popular for small to mid-sized businesses that qualify

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Alternative Ownership Models

These structures prioritize specific goals—member benefit, brand leverage, or project-based collaboration—over traditional profit maximization.

Cooperative

• Member-owned and democratically controlled—each member typically gets one vote regardless of investment size
• Profits distributed as patronage dividends based on members' use of the cooperative rather than capital contribution
• Prioritizes member benefit over profit maximization, distinguishing cooperatives from investor-driven corporations

Franchise

• Licensing arrangement where a franchisee pays fees for the right to operate under an established brand's name and systems
• Reduced entrepreneurial risk through access to proven business models, marketing support, and supply chains
• Operational constraints require franchisees to follow strict guidelines, limiting independence in exchange for brand benefits

Joint Venture

• Temporary partnership formed for a specific project or limited business purpose rather than ongoing operations
• Resource pooling allows parties to combine capital, expertise, and market access without permanent merger
• Shared control and liability during the venture's duration, with terms defined by the joint venture agreement

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Quick Reference Table

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Self-Check Questions

1. Which two business structures offer pass-through taxation while also providing limited liability protection for all owners?

2. An entrepreneur wants complete control and is willing to accept personal financial risk. Which ownership form best fits this preference, and what is the main disadvantage?

3. Compare and contrast C Corporations and S Corporations in terms of taxation and ownership restrictions. Why might a growing company switch from S Corp to C Corp status?

4. A group of farmers wants to form a business where each member has equal voting power regardless of how much they invested. Which ownership structure aligns with this goal, and how does it differ from a traditional corporation?

5. If an FRQ asks you to explain why limited liability encourages entrepreneurship and investment, which business structures would you use as examples, and what economic principle does this illustrate?