What are the three forms of business organization What are the advantages and disadvantages of each?

The forms of business organization refer to the different structures into which a business entity can be established. A business owner must know about all of them so that he can determine which one suits him the best.

There are several business structures with their legal configuration and ramifications along with advantages and disadvantages. Knowing about the different business organizations will help to know and understand the one business structure that will prove beneficial for the owner in the long run

What is Business Organization?

A business organization is a legal entity which can also be called a commercial or Industrial enterprise as well as the people who constitute it. The purpose of a Business organization is to form and operate a commercial enterprise. It takes the help of various economic resources to provide goods and services at profit to the customers

How to Choose a Business Structure

Choosing the right type of business structure is as important as handling the business and making a profit. You might favour a typical form of the business venture but remember there are other business structures in the market and a wise person will make sure to know about all of them before committing.

It is a fact that one cannot choose a business structure randomly as it will have an impact on everything from daily business operations, to pay income taxes and risks. A business determines which legal configuration to adopt that will categorically define the rights and liabilities of the participants, the lifespan and financial structure of the business, personal liability, business liability, business ownership, control, operational costs, costs of formation and how much to pay in tax.

Consulting a professional like business attorneys, accountants, and business counselors beforehand to seek legal advice can prove advantageous. They are the best person to offer detailed information on the form of organization a business owner favors and also on all the other business structures especially if one wants to make a comparison between all the other forms of business organization

Kansas City helps businesses by offering free assistance in forming a business. Another example is Missouri. Small businesses can easily get any help from the state as it wants to promote business in their area. UMKC Innovation Center Partners helps potential entrepreneurs by turning their ideas into business ventures.

Consider the following points before forming your new business

1. Your vision regarding the size and nature of the business
2. Level of control the owner wishes to have
3. The structure an owner is willing to deal with
4. Vulnerability of a business to lawsuits
5. Tax implications of different organizational structures and which income tax return form to file
6. Company’s and owner’s legal liabilities
7. Expected profit or loss of the business
8. Will there be a need to reinvest the earnings in the business?
9. Writing down the details about the business plan including timelines, costs, goals and responsibilities if there are more than one business owners

Forms of Business Organization

Let us go through the different organizational structures along with salient features, advantages and disadvantages so that it becomes easier for an owner to make the right choice

1. Sole Proprietorship

Sole Proprietorship is one of the most common business organizations you will ever find. The majority of small businesses often start as sole proprietorships because they can be owned by single individuals who are referred to as the sole proprietors of the business.

As per the law, the sole proprietors are the one and same with the business as they service businesses

In the Sole Proprietorship businesses, it is the sole proprietors who have the responsibility of running the day-to-day responsibility, handling business operations and making decisions. The sole proprietors are the owners of all the assets of the business and are eligible for all the profits generated by the business transactions. They have to assume all the responsibility for business debts and liabilities

Sole Proprietorships: Salient Features

1. Single ownership
2. Personal liability
3. Personal Assets
4. Complete control
5. Undivided risk
6. No government regulations
7. No separate legal status of the business

Sole Proprietorships: Advantages

1. The sole proprietorship business is the easiest form of business to organize
2. The sole proprietors or the owner of the sole proprietorships receives all the profit from the business to the home or savings account
3. All assets are personal assets of the owner
4. Profits can be taxed only once
5. The cost of forming a sole proprietorship business is very less compared to other business structures
6. There are few regulations for sole proprietorship business
7. A business’s ownership rests with the owner
8. The owner is the decision-maker hence he does not have to face any interference from other stakeholders like partners, directors etc.
9. It is easy to dissolve the sole proprietorship business if the owner so desires

Sole Proprietorships: Disadvantages

The sole proprietorship business has unlimited liability. If anything happens in the business the personal assets of the owner are at a risk. Example-Missouri. Small business owners in Missouri often lose their homes because of unlimited liability

1. There is no separate legal status for a sole proprietorship business
2. Sole proprietorships face difficulties in raising funds
3. It is difficult to acquire consumer loans
4. Sole proprietorship business has a hard time attracting high talent
5. Employee benefits like medical insurance premium of the owner are not directly deductible from the business income
6. Ownership of a sole proprietorship business is difficult to transfer
7. There is no distinction between business and personal income
8. Personal income is at risk

2. Partnerships

If two or more people are looking to start a business together then partnerships are one of the most suitable forms of business organization. A detailed partnership agreement is drafted between the owners who can be two or more than two partners. There is no distinction between the owners and the business.

It is important to seek legal advice and draft a detailed partnership agreement that will safeguard the interest of all the partners.

The partnership operating agreement provides details about how the decisions will be made between the future partners, who will make them, how disputes will be resolved between the future partners, who has the last say, how profits will be shared, how the loss will be shared, how partners will be bought out, how new partners will be incorporated into the partnership and what steps can be taken to dissolve the partnership agreement.

Currently, the partnership is the most common business structure after the sole proprietorship form of business. The partners should make sure to outline every single detail in the partnership operating agreement to avoid any disruptions in the future. For example, Missouri offer legal services so that there are no problems in the business partnership later on

Partnerships: Salient Features

1. Association of two or more people
2. There can be a maximum of 10 partners in the banking business and 20 in non-banking businesses
3. Contractual relationship because of a legal agreement
4. Profit and loss is shared as are business debts and liabilities
5. No separate status of the firm
6. Unlimited liability
7. Restriction on transfer of interest

Partnership: Advantages

1. Partnerships are the easiest form of business to organize
2. The ability to raise funds is increased
3. Profits can be taxed only once
4. Easy to hire exceptional talent with a lure of partnership
5. There is separate legal status to provide liability protection
6. Partners can have complementary skills and this will prove beneficial for the business partnership

Partnership: Disadvantages

1. Partners are both individually and jointly liable for the actions of each partner
2. The decision-making process becomes difficult as the partners can have a difference of opinion
3. Profits will have to be shared will the partners
4. If the partnership does not have a detailed legal agreement it can cause chaos later on
5. Some of the employee benefits are not deductible from business income on tax returns
6. A partnership can end in case of death or withdrawal of a partner

Three types of a Partnerships

1. General partnership

In a General partnership, an internal agreement takes place according to which the partners divide the liability, management responsibilities and share of profit or loss. Unless a written agreement is signed it is assumed that all the partners have an equal share in the general partnership

2. Limited Partnership and Partnership with Limited Liability

A limited partnership is a complex and formal form of business organization. The partners in limited partnerships have limited input and liability.

Limited partnerships are a form of business structure best for short-term projects or projects that require investing in capital assets

3. Joint Venture

A joint venture is a business partnership where an enterprise is established jointly by two or more parties who otherwise retain their business identities. It has some characteristics of both general partnership and limited partnerships because the joint venture acts as a general partnership but works as a limited partnership as it is meant for a limited time or a single project

3. Corporations

According to law, Corporation is a unique business entity with separate status from those who own it. They can enter into contractual agreements and can be both taxed and sued. Corporations cannot be dissolved when ownership changes

Three types of Corporations

1. C-corporation

A C-corporation is a type of business organization that is taxed separately from the owners. Most of the publicly traded companies are corporations for example Apple Inc. The owners of a corporation are the shareholders who elect a board of directors to oversee important policies and make decisions. The corporations have limited liability which helps in increased potential investment and risk-taking

C-Corporation Advantages

1. Liability is limited
2. Easy to raise capital
3. Tax benefits
4. Shareholders can sell their shares thus it is easy to change ownership
5. Company-paid fringe benefits

C-Corporation Disadvantages

1. The C-corporation form of business structure is difficult and costly to form
2. Both the corporations and the shareholder’s earnings are taxed hence there is double taxation to deal with
3. The corporation has to pay corporate taxes at times that are different from what the other forms of businesses pay
4. The C-corporation has numerous administrative duties to perform like annual meetings, keeping minutes of the meeting and notifying shareholders of the meeting, etc

2. S Corporation

An S-corporation also referred to as a subchapter S-corporation does not have to pay federal income tax as both profits and earnings are treated as distributions. The shareholders have to report their income on individual income tax returns

S- Corporation Advantages

1. Limited liability to the owners
2. Profits are taxed only once
3. Easy to raise capital via the sale of stock
4. Avoids double taxation
5. Transfer of ownership is possible

S—Corporation Disadvantages

1. Costly to form
2. Has to perform administrative duties
3. No chance of company-paid fringe benefits
4. Stockholders are limited to trustees, estates, or individuals

4. Limited Liability Company (LLC)

Limited Liability Company (LLC) is referred to as a hybrid business structure that includes operational flexibility of both partnership and sole proprietorship and limited legal liability of a corporation. The owner of a Limited Liability Company (LLC) has to file paperwork to form this type of company.

For example, Kansas City helps businesses that are eager to form LLC by offering to file legal paperwork and helping with federal tax forms for LLCs. You will also find a Technology Development Center in Missouri. Small business can find help from here easily as Missouri offer legal services and assistance in forming Limited Liability Companies. They also help to file legal paperwork and fill the federal tax forms for LLC

Limited Liability Company Advantages

1. • The most important Limited Liability Company advantages are that they are a separate legal entity with limited legal liability
2. • The business structure is most appropriate for small businesses
3. • Must have insurance
4. • Taxed as a sole proprietorship business
5. • No restriction on the number of owners

Limited Liability Company Disadvantages

1. Limited Liability Companies are more formal and complex to form than the general partnership business structure
2. Forming an LLC can prove costly
3. The company has to bear yearly administrative costs
4. The business owners require legal and accounting assistance

Conclusion

Many business building organizations and a vast majority of business owners are aware of a business’s vulnerability. It is not easy to form a business structure that will sustain entrepreneurial efforts in the long run without coming to any harm.

There are numerous business decision possibilities to handle and at such times it is imperative to seek legal help and professional advice that will prove a blessing in the future.

Table of Contents

• What is Business Organization?
• How to Choose a Business Structure
• Forms of Business Organization
• 1. Sole Proprietorship
  • Sole Proprietorships: Salient Features
    • Sole Proprietorships: Advantages
    • Sole Proprietorships: Disadvantages
• 2. Partnerships
  • • Partnerships: Salient Features
    • Partnership: Advantages
    • Partnership: Disadvantages
  • Three types of a Partnerships
  • 1. General partnership
  • 2. Limited Partnership and Partnership with Limited Liability
  • 3. Joint Venture
• 3. Corporations
  • Three types of Corporations
  • 1. C-corporation
    • C-Corporation Advantages
    • C-Corporation Disadvantages
  • 2. S Corporation
    • S- Corporation Advantages
    • S—Corporation Disadvantages
• 4. Limited Liability Company (LLC)
  • • Limited Liability Company Advantages
    • Limited Liability Company Disadvantages
  • Conclusion

What are the three kinds of businesses and what are their advantages and disadvantages?

What are the advantages and disadvantages of forms of business organization?

What are the 3 forms of business organization?

What are the forms of business organizations?