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One of the first decisions you must make as a business owner is how the business should be structured. All businesses must adopt a certain legal configuration that defines the rights and obligations of the participants in the business’s ownership, control, personal liability, longevity, and financial structure.
This decision will have long-term consequences, so you may want to consult with an accountant and lawyer to help you choose the form of ownership that is right for you.
The form of business determines which form of income tax return to file and the company’s and its owners’ legal obligations.
You’ll need to consider the following things when choosing a business type:
- The level of control you want to have
- The level of “structure” with which you are willing to deal with the firm’s vulnerability to litigation
- Tax consequences of different organizational structures
- The expected profit (or loss) of the business
- Whether you need to reinvest the profit in the business or not,
- You need to access cash from the business.
3 Basic Forms of Business Organizations
Generally speaking, three primary forms of business organizations dominate the world.
• Sole Proprietorship
• Partnership
• Corporations
1 – Sole Proprietorship
A sole proprietorship is just like a one-man show. One owner has 100% ownership of the organization’s business.
Main Features
• The formation is very easy
• Very easy to wind up
• More personalize
• Full command authority
• Quick decision-making
• Have limited funds
• 100% profit availability
This is the most commonly used business organization in small-scale businesses worldwide.
Examples:
Retail shops, saloons, grocery stores, legal, tax accounting, and audit firms are the best examples of sole proprietorships.
2 – Partnership
The profit of the partnership firm is shared with partners according to their share capital in the partnership. Simply put, a partnership is a mutual agreement between two or more people to run a business activity for profit.
Types of Partnership
Generally, there are three forms of partnership
• General Partnership
• Limited Liability Partnership
• Joint Venture
General Partnership
When two or a maximum of twenty people make a general agreement to run a business activity to generate profit, this gives birth to a general partnership.
Main Features.
• Minimum two partners
• Maximum twenty partners
• More partners, more capital
• Profit divided based on share capital
• Every partner has Unlimited liability
• The formation is very easy and simple
• Some tax benefits
Limited Liability Partnership.
As the name states, the partner has limited liability in a limited liability partnership. Still, there must be a general partner who takes unlimited liability for the firm and manages all the operations of the organization’s business.
All other persons are liable to the extent of their share capital in the firm, and creditors cannot go after the partners’ assets.
Joint Venture
A joint venture is not a type of partnership, as this type does not fulfil the partnership’s basic requirements. It is an agency of two or more established business organizations that share their resources to accomplish a specific task or project for a specific period. When the said project is completed, the joint venture is automatically dissolved.
3 – Corporation
A corporation is a type of business organization on a large scale that shareholders create. Shareholders are simply the owners of the organization who have shares.
A corporation has a separate legal entity, the shareholders. Every shareholder in the corporation has ownership in the form of shares; shares represent ownership.
The corporation is managed by the Board of Directors, selected by the shareholders by voting. Every shareholder has limited liability for his shares.
Conclusion
In this article, you learned about the different forms of business based on size, industry sector, and ownership structure. You have studied and completed an activity involving several short examples of different forms of business.
If you want to say something about this article, please comment. Your positive criticism is highly welcomed.
Frequently Asked Questions
The most common form of business organization is a sole proprietorship. This is when one person owns and operates a business on his or her own. Some people prefer to incorporate their businesses to protect their assets in bankruptcy. Others choose to open a limited liability company (LLC). An LLC is similar to a corporation in many ways but does not require yearly shareholder meetings or board elections.
These are corporations, partnerships, sole proprietorships, limited liability companies, and non-profit organizations.
A limited liability company is the most common type of business organization, which I recommend you consider. It offers the protection of limited liability, which means only your assets can be held liable for any debts incurred by the company. This is an excellent benefit if you have creditors who might come after your home, car, or other assets.
Business organizations can be either a sole proprietorship, partnership, or corporation. Each type of organization has its benefits and drawbacks.
To know the forms of business organization, we must first determine who is responsible for them. Generally, three types of organizations are responsible for business forms: the government, the company, and the individual.
Business organization is the arrangement of people into different groups. This can be done to achieve specific goals, such as making money, providing a service, or changing. A business organization is commonly used to achieve these goals.
The one that can offer the highest return on investment. In other words, the one that has the best chance to succeed
A business may be organized under one of three entities: a sole proprietorship, partnership, or corporation. Each type has different legal requirements and attributes, which you should review before choosing one type.
The corporate form of business organization enables the company to exist perpetually without filing for dissolution. This makes it much easier to avoid bankruptcy and also makes it much easier to acquire other businesses.
