One of the first decisions you will have to 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 ownership, control, personal liability, longevity, and financial structure of the business. 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.
All businesses must adopt a certain legal configuration that defines the rights and obligations of the participants in the ownership, control, personal liability, longevity, and financial structure of the business. The form of business determines which form of an income tax return to file and the legal obligations of the company and owners.
You’ll need to consider the following things when choosing business type;
- The level of control you want to have.
- The level of “structure” 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.
- Your need to access cash from the business for you.
3 Basic Forms of Business Organizations
Generally speaking, there are three basic forms of business organizations that dominated the world.
• Sole Proprietorship
1 – Sole Proprietorship
A sole proprietorship is just like a one-man show. It has one owner who has 100% ownership of the organization’s business.
• 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 form of business organization in small-scale businesses in the world.
Retail shops, saloons, grocery stores, legal firms, tax accounting, and audit firms are the best examples of a sole proprietorship.
2 – Partnership
The profit of the partnership firm is shared with partners according to their share capital in the partnership. Simply partnership is a mutual agreement between two or more persons to run a business activity for the sake of profit.
Types of Partnership
Generally, there are three forms of partnership
• General partnership
• Limited Liability Partnership
• Joint Venture
When two or a maximum of twenty persons make a general agreement to run a business activity to generate profit then this gives the birth of a general partnership.
• Minimum two partners
• Maximum twenty partners
• More partners, more capital
• Profit divided on the basis of share capital
• Every partner has Unlimited liability
• The formation is very easy and simple
• Some tax benefits
Limited Liability Partnership.
As the name states itself, in a limited liability partnership, the partner has limited liability but 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 personal assets of the partners
A joint venture is basically not a type of partnership as this type is not fulfilling the basic requirements of the partnership. It is basically an agency of two or more established business organizations to share their resources to accomplish a specific task or project for a specific period of time. When the said project is completed the joint venture automatically dissolved.
3 – Corporation
A corporation is a type of business organization on a large scale which is created by shareholders. shareholders are simply the owners of the organization who has shares.
Corporation has a separate legal entity, the shareholders. Every shareholder in the corporation has ownership in the form of shares, shares represent the ownership. The corporation is managed by the Board of Directors selected by the shareholders by voting. Every shareholder has limited liability to his owned shares only.
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. The sole ownership and form of partnership are canceled by the death of insolvency bankruptcy for the departure of a member; it does not have a separate legal entity and the members have full responsibility for the business. On the other hand, society enjoys perpetual succession.
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Frequently Asked Questions
The most common form of business organization is the sole proprietorship. This is when one person owns and operates a business on his/her own. Some people prefer to incorporate their business to protect their personal assets in the event of bankruptcy. Others choose to open a limited liability company (LLC). A 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, and it’s the one I recommend you consider. It offers the protection of limited liability, which means only your personal assets can be held liable for any debts incurred by the company. This is a great 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 own benefits and drawbacks.
In order to know the forms of business organization, we need to first determine who is responsible for them. In general, three types of organizations are responsible for business forms: the government, the company, and the individual.
Business organisation is the arrangement of people into different groups. This can be done to achieve specific goals such as making money, providing a service, or making a change. Business organisation is commonly used to achieve these goals.
Which among the form of business organization is the most
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 types of business entities: sole proprietorship, partnership, or corporation. Each type has different legal requirements and attributes, which you should review before choosing one type over another.
The corporate form of business organization enables the company to exist in perpetuity, without having to file for dissolution. This makes it much easier to avoid bankruptcy and also makes it much easier to acquire other businesses.