With the growing number of corporations taking over small businesses, and the belief that becoming a proprietor is associated with being wealthy, one must decide which type of business to become involved with. There are several differences between these two types of business. A corporation is a business organization having a continuous existence independent of its members (owners) and power and liabilities distinct from those of its members. (Schiller 32) A proprietorship is a business organization created and owned by one person, this one person is called an entrepreneur. When comparing the two one must look at the advantages and disadvantages in relation to profits and taxes, continuity, capital and management ability, and liabilities. Corporations are the largest business structure and can make billions of dollars a year.
There are many expenses that corporations face and they also have to pay very high state and federal taxes. Profits do not belong only to the owner because there is not just one owner, but many owners divided amongst shares of company stock. Potential profits can be reduced because of the following expenses: paying management and employee salaries, paying for employee benefits, re-investing, and paying dividends to shareholders. Taxes also reduce the amount of profit a corporation makes.
Corporations are double taxed, first on earnings from products and services sold, then again with corporate taxes posed by the state and federal government. On the other hand proprietorships are the smallest business structure and generate much less revenue. Because of the talent and risk taken on by the entrepreneurs, all profits are his of hers to keep. The government encourages new businesses so taxes are much lower than that of corporations, and also gives tax breaks to proprietors. Continuity becomes an issue when it comes time for retirement. One of the most valuable assets to a business is the person who runs the company.
When a CEO or any of the board members retires, the company can buy out that person’s shares of stock and the company can still go on. The corporation will not crumble because there are many members that know what is going on in the company and can find the most suitable person to take the CEO’s place. The owners of proprietorships must also retire but when this occurs the business must be sold and continuity becomes a problem for many retiring proprietors. Most proprietors depend on the sale amount of their company for their retirement. Many do not realize that the owner operating the business is the most valuable asset to the company and are surprised when the amount of the sale is less than expected.
A necessary requirement to run a successful business is the availability of capital and management ability. Because a corporation has many shareholders that buy stock in the company, it is very easy for a corporation to attain more capital such as factories, equipment, and inventory. If a corporation needs more funds for any business venture than they can sell more stock to investors. If the company grows then shareholders make money, the shares become worth more and this will cause more investors to want to own a piece of the corporation. Just as important as capital, is management ability. With the funds to hire the best managers and employees, corporations have unlimited management ability and will have a better chance of thriving.
However, capital and management ability can become problems for proprietorships. Since what the entrepreneur has and the entrepreneur can borrow to attain capital are limited, then the size and the organization of the company will also be limited. Also, only so much skill and management ability is available to the proprietor. The proprietor may not have the necessary skills and knowledge start a company. Limitations for capital and management ability can set a proprietorship for failure from the very beginning.
Since a corporation is a separate entity in of itself, there is limited liability. The corporation itself is held responsible for all debts and law suits. This is why shareholders are not held responsible for non-payment of debts or any other business mishaps. For this reason there are credit limits when corporations borrow because if the company goes out of business then the lenders are left with the losses. Unlike the limited liability of corporations, the owners of proprietorships are liable for all debts and losses from the business. The entrepreneur has the risk of losing everything and can be sued if the business fails with debts owed.
The debts of the business are the debts of the owner. If an owner losses their business he or she may also lose their house, car, or any other asset. Therefore whether one plans to work for a corporation or start their own proprietorship, one must realize the differences of each business type. Since corporations (big businesses) put many proprietorships (small businesses) out of business, it is difficult to compete with such giants like Wal-Mart or Best Buy.
Since about ninety percent of businesses fail in the first two years, it is very important to research whatever type of business to participate in (Costello).
If one pursues a proprietorship approach then he or she must be prepared for such a big risk, the odds are against small businesses. For instance, everyday at work I have proprietors call me for their gas prices for the current day. These proprietors that we call IBM’s, are leasing stations from Cumberland Farms, Inc. For the past year I have seen many of these business owners go out of business while they were on a lease with this company.
What many of them do not realize is why we leased our locations to them, it is because those sites were either non-profitable, or they were to close to neighboring states with lower taxes on gas, resulting in loss profits to competitors with lower cost. We also have these IBM’s purchase gas from us, so no matter what, we make a few cents even if they are selling it below their cost, not to mention we compete with them too and our cost is always lower. In locations where we sometimes lose money, we can make up for it with our other stations, but if they only have one station they cannot offset the losses. If they had done some research they would have at least known about lower state taxes on gas. A potential entrepreneur should learn as much about business as possible and create a strong business plan to compete with such large corporations. Not everyone who starts their own business becomes wealthy, some just own a job and some can lose everything..