As an Entrepreneur or Business owner its very important to know what forms of business organisations you want and then structure it to conform to that. It is good to not that there is both advantages and disadvantages to any form you want your company to be. So it needs a good plan to achieve your desired type of business.
The form(s) of business you choose will have great effect on your business amd the future of the company. So you have to analyse the goals you want to achieve and where you want your business to move to in the nearest future.
There are some legal configuration that defines the rights and liabilities of participants in the business’s ownership, control, personal liability financial structure so your business must conform to any of them.
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Note: The form of business you choose will determine:
- How you are taxed
- Your legal liability
- Costs of formation
- Operational costs
When we talk of types of business organization, the major ones are four (4) in number and there are sole proprietorship, partnership, corporation, and Limited Liability Company, or LLC.
Forms of business organisations
This is the simplest and versatile form of business organisation and many small businesses fall in this group and are own and run by one person.
The decision here is taken by the owner and the existence of it depend on the individual and this will cause the end of the business if the sole proprietor (owner) dies. Sole proprietors can be independent contractors or freelancers.
Advantages of sole proprietorship:
- All profits goes to the owner
- There is very little regulation for proprietorships
- profits is taxed onces
- The owner makes all the decisions
- Very few requirements for starting (very easy and less expensive)
Disadvantages of Sole proprietorship:
- 100% of the debt (loan repayments) is on the owner
- It is difficult to raise loan
- Equity is limited to the owner’s personal resources
- Transfer of ownership is difficult
- Business capital might be spent on other things
Partnership (as a form of business organisation)
Unlike proprietorship, is a type of business organisation where two or more people come together to formba single business puting in their money, strength etc in it. This is a well known form of business organisation.
There are two forms of partnership. The General and Limited partnership.
Note: not forms of business organisations
General partnership: All the owners are liable to 100% business debt and risk. General partnerships do not require a formal written agreement. Agreement can be verbal or even implied between the two business owners.
Limited partnerships: A formal agreement between the partners are drafted according to some regulations. A certificate of partnership between the partners will be filed with the state.
Also, Limited partnerships allow partners to limit their own liability for business debts according to their portion of ownership or investment.
Note: In limited partnership, the partners should have a legal agreement that shows clearly how decisions will be taken, how profits and loss will be shared, how disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out or what steps will be taken to dissolve the partnership when needed.
Advantages of partnerships:
- The existence of more than one source of capital provide enough capital for the business
- Profitsare taxed onces
- Each partner shares the total profits of the company
- Desicion making is fast and flexible
- Not costly to establish
- Each partner is 100% responsible for debts and losses
- Selling the business is difficult—requires finding new partner
- Business can suffer if the detailed partnership agreement is not in place.
Corporations as a form of business organisation are taxed more than onces. A corporation is considered by law to be a unique entity, separate from those who own it. This means, among other things, that the profits generated by a corporation are taxed as the “personal income” of the company.
Then, any income distributed to the shareholders as dividends or profits are taxed again as the personal income of the owners. A corporation can be sued by other people. This is also know in forms of business organisations for big companies.
Advantages of a corporation:
- Limits liability of the owner to debts or losses
- Capital is easier to raise through the sale of stock.
- Can be transferred to new owners fairly easily
- Personal assets cannot be seized to pay for business debts
- Corporate operations are costly
- Establishing a corporation is costly
- complex paperwork need to be done to avoid disputes
- With some exceptions, corporate income is taxed twice
Limited Liability Company (LLC)
LLC is also one of the forms of business organisations that provides the owners with limited liability while providing some of the income advantages of a partnership.
Furthermore, LLC combines the advantages of limited partnership and that of corporation and also remove their disadvantages making it superior to them.
Advantages of an LLC:
- Limits liability to the company owners for debts or losses
- The profits of the LLC are shared by the owners without multiple-taxation
- Ownership of business is limited by certain laws
- Business ownership agreement must be comprehensive and complex
- Establishing an LLC has high costs due to legal and filing costs.
These are the major Forms of Business Organizations that every entrepreneur must know to help him drive his business to the level he desires.