Forms of business organization
A business organization is often referred to as a business entity. A business entity is any business organization that exists as an economic unit.
A sole proprietorship is a business owned and usually operated by a single individual. Its main characteristic is that the owner and the business are one and the same. In other words, the revenues, expenses, assets and liabilities of the sole proprietorship are also the revenues, expenses, assets, and liabilities of the owner.
A sole proprietorship is the easiest form of business to organize. It is easy to set up and dissolve it. The only legal requirements for starting such a business are a municipal licence to operate a business and a registration licence to ensure that two firms do not use the same name. A sole proprietorship offers the owner freedom and flexibility in making decisions. Major policies can be changed according to the owner's wishes because the firm does not operate under a rigid charter. The other advantages are complete ownership of profits and lower tax rate.
The owner is legally liable for all debts of the company because the financial condition of the firm is the same as the financial condition of the owner. A sole proprietorship may have difficulty in obtaining capital because lenders are leery of giving money to only one person who is pledged to repay. A proprietorship has a limited life, being terminated on the death, bankruptcy, insanity, imprisonment, retirement, or whim of the owner.
A general partnership is an enterprise owned by two or more individuals. A partnership agreement, oral or written, expresses the rights and obligations of each partner. Partnerships are common among businesses that provide professional services. Doctors, dentists, lawyers, accountants, brokers, and other professionals use this form of ownership to reduce overhead costs for each partner and to take advantage of each other’s expertise in various areas.
A limited partnership is enterprise in which one or more partners are granted limited liability, provided there is always at least one partner with unlimited liability who takes a more active part in managing the business.
Partnerships, like sole proprietorships, are easy to set up. Complementary management skills are a major advantage of partnerships. Partnerships are a stronger entity than proprietorships: it is easier for them to attract new employees and raise additional capital. The other advantages are the following: even higher credit standing and better prospects for growth. Besides taxes are applied to individuals not to partnership,
The major disadvantage of partnerships is that partners, like sole proprietors, are legally liable for all debts of the firm. In partnerships, the unlimited liability is both joint and personal. This means that the partners together are responsible for all the firm's liabilities. If one of the partners cannot meet his or her share of the debts the other partner(s) must pay all debts.
Partnerships are not as easy to dissolve as sole proprietorships. Potential conflicts between partners are one of the disadvantages too.
Corporations are also referred to as limited companies. In limited companies, ownership is represented by shares of stock. The owners at an annual meeting elect a board of directors which appoints company officers and sets the enterprise's objectives.
Limited companies are the least risky from an owner's point of view.