This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
Throughout the world, wherever business enterprises are carried on, there are to be found three basic forms in which the ownership of these enterprises is held.
1. The individual owning outright his own business and usually managing it himself without much cooperation or assistance.
2. A group of owners, working together under some form of partnership agreement.
3. The impersonal owner - the corporation - standing between the business and the individuals who have various kinds and degrees of claims upon the business.
These three basic forms are combined and recombined in many different ways under the' laws and customs of the various commercial countries, but analysis always reveals one or the other of the three forms predominating.
This is shown by the short description, which has been added, of three other forms of business organization not often used but of interest, as showing how difficult it is to get away from the basic types. These are the limited partnership, the joint-stock company, and the association under deed of trust.
The first two of these basic forms - sole proprietorship and partnership - represent the personal relationship of a man or a group of men to the business; but the third form, which is a comparatively modern invention, separates the owner or owners from the business and brings into being an impersonal, intangible thing - a corporation - in which the nominal ownership is vested.
It has been pointed out by writers on economics that there are three elements that must be distributed under any form of ownership; these three elements are risk, income, and management. In the individual proprietorship the three are centered in one man who risks his own capital, undertakes the management, and receives all the income. Under the partnership form, the partners as a body, like the individual owner, undertake the risk and management and receive the income; but among themselves there may be an infinite number of combinations. One partner, for instance, may supply all of the capital; another may supply the management; and they may divide the income in any manner agreed upon. Under the corporate form the risk is taken by the various creditors and shareholders who supply capital under the conditions that have been agreed upon. These creditors and shareholders divide the income in rough proportion to their risk. The management, however, is not necessarily retained in the hands of the people who contribute the capital, but may be turned over to directors and officers who are not personally large shareholders. The tendency has plainly been to separate the supplying of capital for the business and the management of the capital so that they need not necessarily be joined in one man or even in a small group of men.