There are many types of business in the business world. Form the small one to the large one. Choosing the form of business organization is an important decision because it can be critical to the success or the failure of the business organization. Each form of business organization has its advantages and disadvantages.
Things that can be taken to consideration in choosing the type of business: your objectives in setting up the business organization, the amount of capital used up to set the business organization, level of control you wish to have, level of “structure” you are willing to deal with, the business’s vulnerability to lawsuits, tax implications of the different ownership structures, expected profit (or loss) of the business. There are essentially three basic ways to set up your business: sole proprietorship, partnership, and corporation. Each of these has advantages and disadvantages.
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The purpose of this paper is to show what business organizations is and help you to differentiate the types of business organization. In particular, the scope of this paper will be confined to the awareness of business organizations as one way to improve your knowledge in management. This paper will discuss about types of business organization, affects how it operates, how tax is paid, its advantages & disadvantages and how much control its owners have.
Sole proprietorship is a form of business organization in which an individual is fully and personally responsible for all the obligations of the business, and is entitled to all of its profits and exercises complete managerial control. For example, school canteen, florist, salons, etc. The person who owned this form of business is called a sole proprietor or sole trader.
Sole proprietor (the owner of a sole proprietorship) is personally responsible for all debts, taxes, liabilities and claims made against employees acting within the scope of their employment.
Any income that is earned from the business is considered sole proprietor’s income. The sole proprietorship itself is not separately taxed on its income. Instead, the sole proprietor reports business income and expenses on his or her own tax return. This means that the net income from the business is taxed only once.
When the owner of a sole proprietorship dies, the sole proprietorship simply ends. All the assists that the business owns will then just pass under the will of the owner or in accordance with the inheritance law.
Advantages of a Sole Proprietorship
The easiest and least expensive form of business organization to organize. Sole proprietors are in complete control, and within the parameters of the law, may make decisions as they see fit. Sole proprietors receive all income generated by the business to keep or reinvest. The tax consequences are less, as your profits are recorded directly onto your personal income tax return (no double taxation). The business is easy to dissolve if desired.
Disadvantages of a Sole Proprietorship
Sole proprietors have unlimited liability and are legally responsible for all debts against the business. Their business and personal property are at risk. The owner often finds difficulties in raising funds and is often limited to using funds from personal savings or consumer loans. May have a hard time attracting high-quality employees. In a position to grow, the sole proprietorship depends heavily on the time and skills of the owner. When the owner of a sole proprietorship is no longer there to run the business, the company will likely dissolve.
A form of business in which two or more persons join their money and skills in conducting the business. Most people enter into a partnership by having a written partnership agreement prepared. Partnership agreements are a document stating the terms of the partnership for the protection of each partner.
This partnership agreement generally expresses the personal rights of the partners, the liabilities of the partners, and the rules governing the partnership. This agreement document also tends to cover what happen when a partner dies, how the profits and losses should be divided, and what happens when a partner would like to leave the partnership. When no agreement exists, then the statutory rules of the Uniform Partnership Act will apply.
Normally there can be a minimum of two and a maximum of twenty partners to form a partnership. Exceptions are banks, where there cannot be more than ten partners. And also there is no maximum limit for firms of accountants, solicitors, stock exchange members or other professional bodies receiving approval of the Board of Trade for this purpose. A partnership need to be register with the registrar of business and pay the registration fee that is renewable annually. Partnerships are treated as a conduit and are not subject to taxation. Various items of partnership income, expenses, gains, and losses flow through to the individual partners and are reported on their personal income tax returns.
There are three types of partnership as summarized in the paragraphs below.
Partners divide responsibility for management and liability, as well as the shares of profit or loss according to their agreement. Equal shares are assumed unless there is a written agreement that states in a different way.
This form of ownership is not often used for operating retail or service businesses. Forming a limited partnership is more complex and formal than that of a general partnership. General partner and limited partner are two basic types of partners in limited partnership. General partners are those who are responsible for the day-to-day management of activities, whose individual acts are binding on all the partners, and who are personally responsible for the partnership’s total liabilities. Limited partners are those who contribute only money and are not involved in management decisions and whose liability is limited to the amount of their investment.
Joint Venture acts like a general partnership, but is clearly for a limited period or a single project. If the partners in a joint venture repeat the activity, they will be recognized as an ongoing partnership and will have to file as such, and distribute accumulated partnership assets upon dissolution of the entity.
Advantages of a Partnership
Partnerships are easy and inexpensive to establish. With more than one owner, there would be no difficulties in raising fund. Shared responsibility. The tax consequences are less as your profits are recorded directly onto your personal income tax return (no double taxation). Potential employees may be attracted to the business if given the incentive to become a partner. The business usually will benefit from partners who have complementary skills.
Disadvantages of a Partnership
General partners have unlimited liability. Partners are jointly and individually liable for the actions of the other partners. Profits must be shared with others. Since decisions are shared, disagreements can occur. Some employee benefits are not deductible from business income on tax returns. The partnership may end upon the withdrawal or death of a partner.
A corporation is different from a sole proprietorship or a partnership in that a corporation is separate statutorily created legal entity from the people who manage, own, control, and operate it. A corporation can be taxed; it can be sued; it can enter into contractual agreements. Being incorporated essentially means the owner receives limited liability. Those with claims against the corporation can only be rewarded judgments out of the corporation’s assets.
Stockholders are the owners of a corporation based on their holdings. They own an interest in the corporation rather than specific corporate property. Stockholders are also known as shareholders. Shares of stock in the corporation represent the ownership of stockholders. Shares of stock is issued or sold by the corporation. By selling its stock, a corporation raises the capital needed to establish the business and to finance growth. The document, which acts as a contract between a corporation and its shareholders, giving the rights and duties of the shareholders with the company and between themselves, is called Articles of Association.
The corporation has to observe certain legal formalities before it can registered under the Companies Act. Legal documents that required in forming a corporation are called Memorandum of association. And it has to pay registration fee depends on the authorized share capital and is determined on sliding scale
Stockholders are entitled to all net profits that the corporations made. The profits are distributed in the form of cash payments called dividends.
The stockholders elect a board of directors to manage the major policies and decisions. A board of directors is a group of individual selected by the stockholders to represent the stockholders as chairman in the corporation. Board of Directors (BoD) elect the Chief Executive Officer (CEO), Chief Information Officer (CIO), Chief Financial Officer (CFO), make decisions about the corporation’s stocks and dividends, and oversee major policy decisions.
Chief Executive Officer (CEO)
Chief Executive Officer (CEO) is the highest senior management position in an organization, who is responsible for the operations of the corporation; reports to a board of directors; may appoint other managers (including a president). Chief Executive Officer, often also the chairman of the board, and sometimes the president.
Chief Information Officer (CIO)
Chief Information Officer (CIO) is a job title for a manager who is responsible for information technology in the corporation. Chief Information Officer often called the vice president of management information systems or the vice president of data processing. CIO report to the CEO.
Chief Financial Officer (CFO)
Chief Financial Officer (CFO) is a job title for a manager is responsible for the corporation’s accounting and financial structure and activities. The CFO usually reports to the CEO.
Types of Corporation
Corporation can be divided in some type. They are Domestic Corporation, International Corporation, Private Corporation, Public Corporation, Quasi-public Corporation, and Nonprofit Corporation.
A corporation formed in one state to do most of its business in that state.
A corporation which operate internationally (worldwide)
Corporation owned by a few people; shares not available in public market
Corporation owned by a few people; shares available in public market
A corporation that is operated privately, but is supported by the government in its operations and often traded publicly
A corporation that is not formed for the financial gain or profit. Usually it is formed for charitable purposes
Advantages of a Corporation
Shareholders have limited liability for the corporation’s debts or judgments against the corporations. Generally, shareholders can only be held accountable for their investment in stock of the company. (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.) Corporations can raise additional funds through the sale of stock. A corporation may deduct the cost of benefits it provides to officers and employees. Can elect S corporation status if certain requirements are met. This election enables company to be taxed similar to a partnership.
Disadvantages of a Corporation
The process of incorporation requires more time and money than other forms of organization. Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations. Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible form business income, thus this income can be taxed twice
There are essentially three basic ways to set up your business as summarized in paragraph below.
Sole proprietorship is a form of business organization in which an individual is fully and personally responsible for all the obligations of the business, and is entitled to all of its profits and exercises complete managerial control. The person who owned this form of business is called as a sole proprietor or sole trader.
A form of business in which two or more persons join their money and skills in conducting the business. Normally there can be a minimum of two and a maximum of twenty partners to form a partnership. Most people enter into a partnership by having a written partnership agreement prepared. A partnership need to be register with the registrar of business and pay the registration fee that is renewable annually.
A corporation is different from a sole proprietorship or a partnership in that a corporation is the separate statutorily created legal entity from the people who manage, own, control, and operate it. Stockholders or shareholders are the owners of a corporation. Stockholders are entitled to all net profits that the corporations made. The profits are distributed in the form of cash payments called dividends. The stockholders elect a board of directors to manage the major policies and decisions.
A board of directors is a group of individually selected by the stockholders to represent the stockholders as chairman in the corporation. Board of Directors (BoD) elect the Chief Executive Officer (CEO), Chief Information Officer (CIO), Chief Financial Officer (CFO), make decisions about the corporation’s stocks and dividends, and oversee major policy decisions.
The corporation can be divided in some type. They are Domestic Corporation, International Corporation, Private Corporation, Public Corporation, Quasi-public Corporation, and Nonprofit Corporation
List of References
Boone, LE, Kurtz, LD 1992, Management, 4th edn, Von Hoffman Press, New York.
Cole, GA (eds) 1999, Management: Theory and Practice, 5th edn, Ashford Colour Press, Gosport
William, GZ, Middlemist, RD, Middlemist, MR 1995, Business the American Challenge for Global Competitiveness, Von Hoffman Press, New York.
Business Organization (n.d.), viewed 27 September 2004, <http://www.myownbusiness.org/s4/>.
Business Organization (n.d.), viewed 27 September 2004, <http://www.mnbar.org/busorg.htm>.
Forms of Business Ownership (n.d), viewed 27 September 2004, <http://www.onlinewbc.gov/docs/finance/org_form.html>.
McNamara, C 2002, Introduction to U.S. Business Organizations, viewed 27 September 2004, < www.managementhelp.org/org_thry/org_thry.htm>.
Types of corporations (n.d.), viewed 27 September 2004, <http://www.cra-arc.gc.ca/tax/business/topics/corporations/ menu-e.html.
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