The Forms that Companies Take

Business organizations, or companies, are a significant aspect of the U.S. and world economies. As Exhibit 1 shows, a company may be organized as a (1) sole proprietorship, (2) partnership, or (3) corporation.

Sole Proprietorship

A sole proprietorship is a company owned by one individual who is the sole investor of capital into the company. Usually the sole owner also acts as the manager of the company. Small retail stores and service firms often follow this form of organization. The sole proprietorship is the most common type of company because it is the easiest to organize and simplest to operate. In 1995, roughly 75 percent of all companies were sole proprietorships.

Partnerships

A partnership is a company owned by two or more individuals (sometimes hundreds of individuals) who each invest capital, time and/or talent into the company and share in the profits and losses of the company. These individuals are called partners, and their responsibilities, obligation, and benefits are usually described in a contract called a partnership agreement. Accounting firms and law firms are examples of partnerships. In 1995, just under 7 percent of all US companies were partnerships.

Corporations

A corporation is a company organized as a separate legal entity, or body (separate from its owners), according to the laws of a particular state. In fact, the word corporation comes from the Latin word for body (corpus). In 1995, over 18 percent of all US companies were corporations.

By being incorporated, a company can enter into contracts, own property, and sell stock. Shares of capital stock are issued go owners, called stockholders, as evidence of their investment of capital into the corporation. These shares are transferable from stockholder to stockholder, and each share represents part-ownership of the corporation. A corporation may be owned by a few or by many stockholders. In fact, many large corporations have thousands of stockholders. For example, in its 1996 annual report Intel Corporation indicated that its stockholders owned 821,000,000 shares of stock!

The organization and legal structure of a corporation is more complex than that of a sole proprietorship or a partnership. Although sole proprietorships are the most common type of company, corporations conduct the greatest volume of business in the United States. In 1995, sole proprietorships earned nearly 6 percent, partnerships over 5 percent, and corporations just under 90 percent of all business sales in the United States.

Exhibit 1. Types of Business Organization (Companies)

Unit 3 Accounting Profession

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