Final answer:
Agency problems are minimal in sole proprietorships but grow in partnerships and are most significant in corporations due to the separation of ownership and management. Nonetheless, corporations are popular for their limited liability features, capital-raising abilities, and growth potential.
Step-by-step explanation:
Agency problems vary across business structures. In a sole proprietorship, where one individual owns and manages the business, agency problems are minimal as the owner's interests align with the business's success. However, the owner assumes all risks and liabilities. Partnerships face potential agency issues among partners, as they share profits and decision-making, leading to conflicts if interests diverge. Corporations introduce a significant potential for agency problems, as ownership is separate from management. This separation can cause conflicts of interest between shareholders (owners) and corporate executives (agents).
The popularity of the corporate form owes much to its ability to limit owner liability and attract investment. Corporations allow for the separation of personal assets from the business’s liabilities, thereby reducing personal financial risk. This form also permits easier capital accumulation by issuing stock and creates opportunities for growth and expansion, features not available to sole proprietorships and partnerships.