A sole proprietorship is the simplest way to carry on business. The individual is the sole owner of the business. The sole proprietorship business and the owner are one and the same. All benefits from the business accrue to the sole proprietor and all obligations of the business are the responsibility of the sole proprietor. The main disadvantage of sole proprietorship is that the individual is fully exposed to personal liability with respect to any and all claims relating to the business.

A partnership is established when two or more people agree to pool their financial, managerial, and technical resources in order to operate a business for profit (partners of a partnership can also be a corporation). Each partner owes every other partner a duty to act in the best interests of the partnership. Like a sole proprietorship, a partnership is not taxed as a business that is separate from its owners. The income from the partnership is included as part of the partners’ personal incomes and taxed accordingly.

A corporation is distinct from a sole proprietorship and partnership in one fundamental way: it is a separate legal entity. It has a legal existence independent from the owners of the business. It can buy, own, and sell property, sue and be sued, and must file its own income tax return.