Forms Of Business Organizations
The three main forms of business organizations found in business practice are sole proprietorships, partnerships and corporations, also known as limited liability companies. The sole trader is characterized as owned by one owner who manages the business enterprise and receives the profits earned by the organization. A sole trader has an unlimited liability and regulatory bodies require no public financial statements. As can be seen from the features named above a sole trader holds the advantage of no legal formalities for financial statements preparation limiting administrative costs.
Indeed such business enterprise is very easy to set up with a small amount of capital normally needed. Having the owner directly engaged in the firm’s operations will also diminish overhead expenditure and enhance the effectiveness of the company’s activities since staff employed can be more closely supervised. Entrepreneurs are sometimes required to shift from a sole trade to one of the other forms of business enterprise due to the disadvantages inherent in such form. The lack of capital finance faced by sole trader is one of the most critical limitations that hinder the owner to undertaken all feasible business projects.
The economies of scale attained by large organizations will also limit the competitiveness of a sole trader, who is normally a small enterprise due to the capital problem. The excessive commitment demanded on the entrepreneurs is another disadvantage, who are usually requested to work very long hours. In addition the employment of more than one owner in the firm can increase the innovation of the company, since two heads can function better than one. Due to the disadvantages outlined in the previous paragraph sometimes a small trade expands to a partnership by employing additional owners in the business.
Such business enterprise is also easy to set up and provides a more material amount of capital finance. Partners also take an active role in the firm thus enhancing effectiveness. The hours committed and originality is also improved by having more people employed in the management of the business enterprise. The financial disadvantage of unlimited liability, which is present both for a partnership and a sole trader, is an important factor. Being financially responsible with your personal finance for the debts of the partnership can lead to conflicts between partners in the way the firm is managed.
The corporation, which is the latter form of business organization, has the important advantage of limited liability. This safeguards the personal finance of the owners. Such business enterprise is also capable of raising more long-term finance both from equity and debt. This therefore leads the possibility to operate on a larger scale and attain economies of scale. A corporation is also protected as a separate legal entity by the law. Considerable legislative controls are present upon corporations from its formation to its running, which increases the administrative expenditure.
For example, a corporation is required to employ an auditor to examine the annual financial statements held public. The lack of interest of shareholders, which often end up employing managers, can also limit the effectiveness of the company. In fact, we have to bear in mind that like economies of scale, large firms can also face diseconomies of scale. The overall objective of the financial manager is to maximize shareholders wealth. Actually this should coincide with the corporate aim of the organization. However, management should consider such statement meticulously.
Indeed sometimes managers are required to make decisions that in the short-term will conflict with such objective, but in the long run they abide with it. For instance, a manufacturer of rubber is required to adopt sophisticated machines that limit environmental pollution. Such capital equipment would be more costly than the traditional one, leading to a decrease in shareholders wealth in the short term. However, by following such environmental factors, the company will decrease the risk of environmental fines and enhance the reputation of the firm as one that cares for the environment.This will eventually increase shareholders’ wealth in the long term.
Canada Business (2007). Forms of Business Organization (on line). Available from: http://www. canadabusiness. ca/servlet/ContentServer? pagename=CBSC_ON/display&c=GuideFactSheet&cid=1085667968842&lang=en (Accessed 8th October 2007). Pike R. ; Neale B. (1999). Corporate Finance and Investment. Third Edition. London: Prentice Hall. Trigwell Jones M. (1999). How to Pass Business Practice. United Kingdom: London Chamber of Commerce and Industry.