Forms of Business Organization Example

* Limited Ability to Raise Capital Sole proprietorships are unable to sell interest or shares in the business as a means of raising money. They also lack the clout other forms of business structure carry, making it more difficult to obtain loans and other funding resources. * Limited Expertise and Growth Potential Sole proprietors are in charge of every aspect of the business, including product and service development and delivery, marketing, accounting and customer service.

Most sole proprietors are knowledgeable about their business product or service, but have limited knowledge or experience in the other areas. This lack of expertise can slow and even limit growth. Further, there is only so much a single person can accomplish. At some point, owners max out the amount of time they can spend on business activities and can’t grow without adding more manpower to the business. * Limited Life Expectancy The success of most sole proprietorships is so closely tied to the owner that the business may be unable to survive the loss of the owner through illness or death.

While sole proprietorships can be sold or transferred to heirs, they often struggle to survive because the new owners lack the knowledge to keep them going or the customers’ loyalties were to the original owner and not the business. SOURCE/S: 2007, http://www. nytimes. com/allbusiness/AB4113314_primary. html Truex, 2010 http://smallbusiness. chron. com/disadvantages-sole-proprietorship-business-376. html 2. Partnership – A business organization in which two or more individuals manage and operate the business. Both owners are equally and personally liable for the debts from the business. ADVANTAGES:

* Capital – Due to the nature of the business, the partners will fund the business with startup capital. This means that the more partners there are, the more money they can put into the business, which will allow better flexibility and more potential for growth. It also means more potential profit, which will be equally shared between the partners. * Management – This organization is considered flexible as compared with Joint Stock Company. Partners can change their business policy with mutual consultation. They thus make immediate decision, since there is no necessity of disposing of resolution.

The quickness of action is the most important element in the field of management as well as in marketing. * Taxes – Generally, the IRS does not consider partnerships to be separate from their owners for tax purposes; instead, they are considered “pass-through” tax entities. This means that all of the profits and losses of the partnership “pass through” the business to the partners, who pay taxes on their share of the profits (or deduct their share of the losses) on their individual income tax returns. Each partner’s share of profits and losses is usually set out in a written partnership agreement. DISADVANTAGES:

* Disagreements – One of the most obvious disadvantages of partnership is the danger of disagreements between the partners. Obviously people are likely to have different ideas on how the business should be run, who should be doing what and what the best interests of the business are. This can lead to disagreements and disputes which might not only harm the business. * Agreement – Because the partnership is jointly run, it is necessary that all the partners agree with things that are being done. This means that in some circumstances there are fewer freedoms with regards to the management of the business.

* Liability – Ordinary Partnerships are subject to unlimited liability, which means that each of the partners shares the liability and financial risks of the business. This can be off putting for some people. This can be countered by the formation of a limited liability partnership, which benefits from the advantages of limited liability granted to limited companies, while still taking advantage of the flexibility of the partnership model. * Taxation – One of the major disadvantages of partnership, taxation laws mean that partners must pay tax in the same way as sole traders, each submitting a Self Assessment tax return each year.

They are also required to register as self employed with HM Revenue & Customs. * Profit Sharing – Partners share the profits equally. This can lead to inconsistency where one or more partners aren’t putting a fair share of effort into the running or management of the business, but still reaping the rewards. SOURCE/S: http://www. nolo. com/legal-encyclopedia/how-partnerships-are-taxed-29710. html 2009, http://i2biz. blogspot. com/2009/08/advantages-of-partnership. html Adrian, 2010 http://blog. thecompanywarehouse. co. uk/2010/03/01/advantages-anddisadvantages-of-partnership/ 3.

Corporation – is a separate legal entity that has been incorporated through a legislative or registration process established through legislation. Incorporated entities have legal rights and liabilities that are distinct from their employees and shareholders, and may conduct business as either a profit-seeking business or not for profit business. ADVANTAGES: * Capital: * Issuing Bonds – A bond is a written promise to pay back a specific amount of money at a certain date or dates in the future. In the interim, bondholders receive interest payments at fixed rates on specified dates.

Holders can sell bonds to someone else before they are due. * Issuing Preferred Stock – A company may choose to issue new “preferred” stock to raise capital. Buyers of these shares have special status in the event the underlying company encounters financial trouble. * Selling Common Stock – If a company is in good financial health, it can raise capital by issuing common stock. Typically, investment banks help companies issue stock, agreeing to buy any new shares issued at a set price if the public refuses to buy the stock at a certain minimum price.

* Borrowing – Companies can also raise short-term capital — usually to finance inventories — by getting loans from banks or other lenders. * Using profit – As noted, companies also can finance their operations by retaining their earnings. Strategies concerning retained earnings vary. Some corporations, especially electric, gas, and other utilities, pay out most of their profits as dividends to their stockholders. * Management – A corporation is managed by its board of directors, which must approve major business decisions. A director can be, but is not required to be, either a shareholder or an officer.

Just as representatives in Congress are elected by voters, directors are elected by the shareholders and typically serve for a limited term. Each corporation must have at least one director. * Taxes – Corporations are taxed differently than other business structures: A corporation is the only type of business that must pay its own income taxes on profits. In contrast, partnerships, sole proprietorships, and limited liability companies (LLCs) are not taxed on business profits; instead, the profits “pass through” the businesses to their owners, who report business income or losses on their personal tax returns.

Because a corporation is a separate legal entity from its owners, the company itself is taxed on all profits that it cannot deduct as business expenses. Generally, taxable profits consist of money kept in the company to cover expenses or expansion (called “retained earnings”) and profits that are distributed to the owners (shareholders) as dividends. DISADVANTAGES: * Incorporation is costly – Incorporating a business needs to file with the Securities and Exchange Commission (SEC) and may involve a lot of formal and legal papers, such as by laws, articles of incorporation, affidavit and board resolutions. * Corporations are highly regulated.

Ordinary corporations are regulated by the SEC. Special corporations may be required with secondary licenses and are further regulated by other government agencies, such as Bangko Sentral ng Pilipinas (BSP) for financing and lending companies, Commission on Higher Education (CHED) for companies operating secondary schools and Insurance Commission (IC) for insurance companies. * Limited liability may discourage creditors. The limited liability feature of the corporation can be an advantage for stockholders. However, it can also be a disadvantage when a corporation doesn’t have a good financial condition and performance.

* It may result to double taxation. Since the corporation is already taxed on its income, distributing this income to shareholders in the form of dividends may result to double taxation. This is because the dividend income received by the shareholders (natural persons) is also taxed on their personal income tax returns. * It is not easy to dissolve. Corporations are difficult to dissolve as it is also difficult to form. Everything is regulated from formation, to operation, and to dissolution. An application for dissolution must be filed with the S. E.

C with complete requirements, including tax clearance with the Bureau of Internal Revenue. The liquidation process is also regulated to ensure that the rights of any creditor having a claim against it are not prejudiced. SOURCE/S: http://www. investopedia. com/terms/c/corporate-capital. asp http://economics. about. com/od/smallbigbusiness/a/corp_capital. htm http://www. legalzoom. com/incorporation-guide/corporation-management. html http://www. nolo. com/legal-encyclopedia/how-corporations-are-taxed-30157. html http://businesstips. ph/advantages-and-disadvantages-of-forming-a-corporation/.