It is important that the business owner seriously considers the different forms of business organization — types such as sole proprietorship, partnership, and corporation. Which organizational form is most appropriate can be influenced by tax issues, legal issues, financial concerns, and personal concerns. This essay explains the general impression of business organizations.
A Sole Proprietorship, also known as the sole trader or simply proprietorship, is a type of business entity that is owned and run by one individual and in which there is no legal distinction between the owner and the business. The owner receives all profits (subject to taxation specific to the business) and has unlimited responsibility for all losses and debts. Every asset of the business is owned by the proprietor and all debts of the business are the proprietor’s.
Sole Proprietorships are the most numerous form of business organization in the United States, however they account for little in the way of aggregate business receipts. It controls 72% of business in the United States however, 20% end up filing for bankruptcy. Although the number is large when it comes to income and sales, the number is minute. When starting a sole proprietorship, one should open it when they are certain they won’t fail, file a 1040, and must be cautious that if you violate regulation, you may be out of business because of the government, however, they cant touch your pension.
There are many advantages and disadvantages to this form of business. The many advantages are: ease and cost of information, secrecy, distribution and use of profits, flexibility and control of the business, minimal government regulations, and easy taxation. The many disadvantages are: unlimited liability, limited sources of funds (banks don’t like to lend money), limited skills, lack of continuity, lack of qualified employees, and taxation.
Another form of business organization is partnership. Partnership is a form of business organization defined by the uniform partnership act as an “association of two or more person who carry on as co-owners of a business profit.” Marriages can be problematic and many of them do fail. There are two kinds of partnerships. A General Partnership is a partnership that involved a complete sharing in both the management and liability of the company.
A Limited Partnership is two or more partners united to conduct a business jointly, and in which one or more of the partners is liable only to the extent of the amount of money that partner has invested. Limited partners do not receive dividends, but enjoy direct access to the flow of income and expenses. When starting a partnership one must file a 1065, then transfer to 1040, but everyone must file separately. Every company has its own code standard industrial classification system as well.
There are advantages and disadvantages of partnerships as well. The many advantages are: ease and organization, capital and credit, knowledge and skills, decision making, and regulatory control. The disadvantages are: unlimited liability, business responsibility, life of the partnership, distribution of profits, and limited sources of funds. The articles of a partnership are: name, purpose location, duration of the agreement, authority and responsibility of each partner, character of partner, amount of contribution from each partner, division of profit or losses and salaries of each partner.
The keys of success to a partnership are: keep profit sharing and ownership at 50/50, honesty is crucial, experience is essential, transparency, maintain face to face communication, family is priority, be realistic, awareness of funding constraints and limited resources, and partners should have different and complementary skill sets.
The last form of business organization is corporation. A corporation is a legal entity created by the state whose assets and liabilities are separate from its owners. Corporations generate the largest income, and the most sales. Articles of incorporation are legal documents filed with basic information about the business with the appropriate state office. These articles include the name and address of corporation, objectives of the corporation, classes of stock, and financial capital required at time of incorporation. There are many types of corporations such as domestic corporation, foreign corporation, alien corporation, private corporation, public corporation, initial public offering, quasi-public corporation, and non-profit corporation. The elements of corporation include: a board of directors, preferred stock, and common stock.
There are many advantages and disadvantages of corporations. The advantages are: limited liability, transfer of ownership, perpetual life, external sources or funds, and expansion potential. The disadvantages are: double taxation, forming a corporation, disclosure of information, and employee-owner separation.
Other types of business ownership include; a joint venture which is a partnership established for a specific project for a limited time. S- Corporation which is a corporation taxed as though it were a partnership (no double taxation) with restriction on shareholders. LLC which is a flexible form of enterprise that blends elements of partnership and corporate structures. Co-op which is an organization of individuals or small businesses that have banded together to reap the benefits of belonging to a larger organization. Mergers which is the combination of two companies to form a new company.
Forward Integration which is when a manufacturer buys the wholesalers and retailers, in control of all their intermediaries and distribution. Backwards Integration which is when the retailers buys the wholesalers and manufacturer. Acquisition which is the purchase of one company by another, usually by buying its stock and/or assuming its debt and Leverage buyout which is a purchase, in which a group of investors borrows money from banks and other institutions to acquire a company, using the assets of the purchased company to guarantee payment of the loan.