Form of Business Organisation
There are three main forms of business organisation : Sole proprietorship, Partnership and Corporation.
1.Sole proprietorship
- A business owned by a single individual.
- The owner of a sole proprietorship keeps all the profits
- The owner has unlimited liability for business debts
- There is no distinction between personal and business income, so all business income is taxed as personal income
- The life of a sole proprietorship is limited to the owner’s life span
- The amount of equity that can be raised is limited, so the business is unable to exploit new opportunities because of insufficient capital.
- Ownership of a sole proprietorship may be difficult to transfer because this transfer requires the sale of the entire business to a new owner.
2.Partnership
Business owned by two or more persons who are personally for all its liabilities. Partnership has general partnership and limited partnership.
In a general partnership, all the partners share in gains or losses, and all have unlimited liability for all partnership debts, not just some particular share. The way partnership gains (and losses) are divided is described in the partnership agreement. This agreement can be an informal oral agreement or formal written document.
In a limited partnership, one or more general partners will run the business and have unlimited liability, but there will be one or more limited partners who will not actively participate in the business. A limited partner’s liability for business debts is limited to the amount that partner contributes to the partnership.
Here are some things that are important when considering a partnership:
- Partnerships are usually inexpensive and easy to form.
- General partners have unlimited liability for all debts. The liability of limited partners is usually limited to the contribution each has made to the partnership. If one general partner is unable to meet his or her commitment, the shortfall must be made up by the other general partners.
- The general partnership is terminated when a general partner dies or withdraws ( but this is not so for a limited partner).
- It is difficult for a general partnership to transfer ownership without dissolving because a transfer requires that a new partnership be formed. Usually, all general partners must agree. However, A limited partner’s interest can be sold without dissolving the partnership, but finding a buyer may be difficult.
- the amount of equity that can be raised is limited to the partners’ combined wealth.
- All income is taxed as personal income to the partners.
- Management control resides with the general partners. Usually a majority vote is required on important matters, such as the amount of profit to be retained in the business.
Based on our discussion, the main advantage to sole proprietorships and partnerships is the cost of getting started. The primary disadvantages of sole proprietorships and partnerships as forms of business organization are (1) unlimited liability for business debts on the part of the owners, (2) limited life of the business, and (3) difficulty of transferring ownership. These three disadvantages lead to (4) the difficulty of raising cash.
3.Corporation
Business owned by stockholders who are not personally liable for the business’s liabilities.
The incorporators must prepare articles of incorporation and a set of bylaws. The articles of incorporation must include the following:
- Name of the corporation.
- Intended life of the corporation( if may be forever)
- Business purpose.
- Number of shares of stock that the corporation is authorized to issue, with a statement of limitations and rights of different classes of shares.
- Nature of the rights granted to shareholders.
- Number of members of the initial board of directors.
In its simplest form, the corporation comprises three sets of distinct interests: the shareholders ( the owners), the directors, and the corporation officers (top management). The shareholders elect a board of directors, who in turn selects top management. Members of top management serve as corporate officers and manage the operation of the corporation in the best interest of the shareholders.
The potential separation of ownership from management gives the corporation several advantages over proprietorships and partnerships:
- Because ownership in a corporation is represented by shares of stock, ownership can be readily transferred to new owners.
- The corporation has unlimited life. Because the corporation is separate form its owners, the death or withdrawal of an owner does not affect its legal existence.
- The shareholders’ liability is limited to the amount invested in the ownership shares.
These major advantages give the corporation an enhanced ability to raise cash. There is, however, one great disadvantage to incorporation. This is double taxation, meaning that corporate profits are taxed twice: at the corporate level when they are earned and again at the personal level when they are paid out dividends.
Limited Company:
The corporate form of organization has many variations around the world. The exact laws and regulations differ from country to country, of course, but the essential features of public ownership and limited liability remain. These firms are often called corporation, limited liability company, public limited company or joint stock company.
Characteristics of business organization:
| Sole proprietorship | partnership | Corporation | |
| Who owns the business? | The manager | partners | Shareholders |
| Are managers and owner separate? | No | No | Usually |
| What is the owner’s liability? | Unlimited | Unlimited | Limited |
| Are the owner and business taxed separately? | No | No | yes |