When sole proprietors want to increases their source of capital, they can partner with other likeminded entrepreneurs to form what is referred to as partnership. A partnership can get capital from members’ contribution, and loan among many other sources. One advantage of this kind of business is that all members can have full control of the business, and partners can help each other to contribute more capital. Unlike sole proprietorship, the partners do not get 100 percent of the profits as it has to be shared among the partners. The return for individual partners is in the form of profits which are shared.
A partnership can increase its capital by selling part of the ownership to the public. Consequently, the partnership becomes a limited company. In this kind of venture, the shareholders get returns in the form of dividends. They are also granted a right to vote, but they do not have direct control of the company, and they do not make day to day decisions. This role is assigned to directors, who are voted by the shareholders. One disadvantage of selling shares to the public is that the profits are reduced, as many shareholders have to be paid dividends.
A company is liable to pay corporate tax, while the shareholders are taxed on their dividends. A company has several advantages, including continuity of ownership because the shares are transferable. The shareholders trust the management of the company to the directors through what is referred to as agency relationship. This structure comes with scores of problems, especially because some agents do not act in the interest of the shareholders.