When beginning a business, it is extremely important that the owners of the business decide the organizational form that will be beneficial to maximize the value of the firm. The owners must consider the size of the business, the taxation of the business, the liability of the owners and the ability to raise capital to finance the business (Parrino, Kidwell & Bates, 2012). The owners will then choose one of the 3 different forms: sole proprietorship, partnership or corporation. Sole Proprietorship Sole proprietorships are businesses that are owned by a single person.
A sole proprietorship is the easiest to form and the most common form of business. One advantage of this type of business structure is that it is quite simple and easy to start and launch. Another advantage is that the owner has complete control over the business and fairly easy tax preparation. Sole proprietorships have no hard regulation regarding registration and permission. One major disadvantage of a sole proprietorship is the unlimited personal liability of the owner. The owner is entitled to all of the profits, but is also liable for any debts or losses.
A final disadvantage of a sole proprietorship is that it is very difficult to raise capital to finance the company’s operations (Parrino et al, 2012). Partnerships Partnerships are very similar to that of sole proprietorships except that partnerships consists of two or more owners. Each of the partners contribute to all aspects of the business. Partnerships fall into 3 different categories: general partnership, limited partnership and joint venture (Parrino et al. , 2012). Just like sole proprietorships, partnerships are easy and inexpensive to form.
Another advantage of a partnerships is that each partner is equally invested into the business. The major disadvantage of a partnership is that partners share the business’s Business Structures pg. 2 liability. Each partner is not only responsible for his or her decisions, but also for the decisions of the other partners. Secondly, all partners share the profits in a partnership (Parrino et al. , 2012). Corporations A corporations is very different from sole proprietorships and partnerships. Corporations are owned by shareholders and are considered to be an independent legal entity.
Corporations have very expensive administration fees and very complex tax and legal requirements. The main advantage of corporations is that the shareholders are not responsible for the debts of the company. They are only liable for their investment into the company. Corporations can also sell stock to raise any capital that is needed for the business. Corporations file a separate taxes from that of the owners. Owners of a corporation are taxes on the profits that the receive through salaries, dividends and bonuses. One major disadvantage of a corporation is that they are very costly and time consuming to start and maintain.
Sometimes corporations can be subjected to double taxes through taxes on profits and then taxes on dividends. Corporations require an increased amount of paperwork and record keeping. A final disadvantage of this kind of business structure is that the business operations are handled by the managers and the board of directors who can cheat the owners of the business (Parrino et al. , 2012). Choosing the correct business structure is an extremely essential part of the business formation process. Selecting the wrong structure can become a very costly mistake for an organization.
An organization must ensure that their business structure ensures that the owners are happy and that the value of the organization is maximized. Business Structures pg. 3 References Parrino, R. , Kidwell, D. S. & Bates, T. W. (2012). Fundamentals of corporate finance (2nd ed. ). Hoboken, NJ: Wiley. University of Nevada Las Vegas: “Planning Your Business: Research, Goals, and Business Plans” Retreived from: http://digital. films. com/PortalViewVideo. aspx? xtid=42248&loid =116024. Vaux, R. , “The Five Types of Business Stuctures” Retrieved from: http://smallbusiness. chron. com/five-types-business-structures-10163. html.