Forms of Business Organizations
The main forms of business organizations are sole proprietorship, partnership, and corporation.
Sole proprietorship is the simplest way to set and run business, because a sole proprietor is the only responsible person for all company’s debts and obligations. It is known that a creditor who has a claim against a sole proprietor has all rights to receive all his personal and business assets. It is called unlimited liability. The sole proprietor is allowed to run his business under his own name without any other words.
Advantages: all profits are received by sole proprietor, relatively low start-up costs and capital, the greatest freedom from regulation, minimal working capital, tax advantages to owner of the business, owner has the direct control over the decision-making process. Disadvantages: unlimited liability, difficulties in raising capital and lack of continuity in sole proprietorship if the owner is absent for a long time.
Partnership is an agreement when two or more sides (persons) are going to combine their available resources in one business. Partnership agreement has to be signed with the assistance of lawyers, because in case of dissolution or disagreement the business should protect its shareholders or other partners. According to the agreement terms partners has to share in all the profits. There are two forms of partnerships: general partnership (all partners are personally liable for all debts and obligations) and limited partnership (some members are responsible for debts).
Advantages: easy formation, relatively low start-up costs, additional available resources of investments, possible tax advantages, limited regulation and broader base of management. Disadvantages: divided authority, unlimited liability, lack of continuity, difficulty in raising capital and finding suitable partners, possible conflicts between the partners.
Corporation is known to be a legal entity “that is separate from its owners, the shareholders”. Shareholders are not personally responsible for debts and obligations and acts taken. Corporation can be either private or public. Private corporation can be formed by one or more persons and it is not allowed to share securities to the general public. Public corporation issues securities and shares for public distribution.
Advantages: limited liability, specialized management, continuous existence, separate legal entity, possible tax advantages, easy rising of capital and ownership is transferable. Disadvantages: close regulation, the most expensive form of organization, charter restrictions, double taxation of dividends, conflicts between shareholders and executives, and extensive record keeping.
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My brother and his few buddies are willing to start their own business. It is a matter of fact that there are several forms of business organization they are able to start and it is necessary to take pros and cons of each form very carefully as organizational forms plays crucial role in business development. I won’t recommend my brother to go solo. Instead, I’ll recommend referring to partnership and, in my opinion, it is the most appropriate form when starting new business.
Firstly my brother should fully understand what the partnership is. Actually, as it is mentioned in the first section, partnership is defined as any entity in which two or more partners are liable for profits and loses of the company they have started. Nevertheless, partnership can be general, limited and limited liability partnership.
General partnership suggests that all partners are running their business equally and they are personally liable for losses or debts. In its turn, limited liability partnership suggests that partners are provided with limited responsibility for debts. I’d like to underline that it is rather easy to set partnerships compared with corporations. Partners have to agree they are ready to share decisions and are willing to become equal business owners. When all points are agreed, people involved are automatically considered partners who are ready to share profits, debts and lose.
As there is more than one owner, there will be more money available to help set up the business. New partners can bring in new skills and experience that may help the business to make more profit. You can share out the responsibilities between the partners. This means that no single person is responsible for running all of the business. If the business experiences financial difficulties there will be other people to share the costs with you. This reduces the risk of losing money. Expanding the business can be made easier as new partners can be introduced.
The next benefit my brother should be aware of is the fact that it is possible to keep certain private information from other people. For example, partnership allows not publishing official accounts and, therefore, people remain unaware of your earnings. Choosing general partnership provides also benefits as there is no need to register with the state and to pay high fees; whereas it is obliged if a person wants to set either limited liability company or corporation. I think that general partnership is the most appropriate.
In contrast to regular corporation, there is no need to file separate tax returns for the corporate entity and its owners. A limited partnership can be attractive for a limited partner who can provide funding but not expertise, and does not have the time to devote to being a hands-on part of the business. It is much easier to attract investors as limited partners.