Chapter Business Ownership and

4 Organization

Forms of Business Organization

One of the first decisions you'll have to make as a business owner is how to structure
your company. To ensure that you're making the best decision for your new business, you should
understand the benefits and drawbacks of each type of business organization.

All businesses must have some kind of legal structure that defines the rights and
liabilities of those involved in the business's ownership, control, personal liability, lifespan, and
financial structure. The type of business determines which income tax return form to file as well
as the legal liabilities of the company and its owners.

This is a big decision with long-term consequences, so if you're not sure which type of
business is best for your company, you should consult a professional.

When establishing your new business, you should consider the following:

 Your (practical) vision for the size and nature of your company.
 The degree of control you desire.
 The degree of "structure" you are willing to accept.
 The company's susceptibility to lawsuits.
 The tax implications of various organizational structures
 The anticipated profit (or loss) of the business.
Sole proprietorship
Sole proprietorships are the foundation of the vast majority of small businesses. These
businesses are usually owned by a single person, who is also in charge of the day-to-day
operations. Independent contractors, freelancers, and home-based businesses are examples of
sole proprietors.

ADVANTAGES OF SOLE PROPRIETORSHIP

 The owner receives all profits.
 Profits are only taxed once.
 The owner makes all decisions and has complete control over the business (could also be
a disadvantage)
 The simplest and least expensive form of ownership to set up.

DISADVANTAGES OF SOLE PROPRIETORSHIP

 If something goes wrong in the business, you have unlimited liability. Your personal
assets are in jeopardy.
 Raising funds is difficult, and you may need to take out consumer loans.
 There is no separate legal status.

Partnerships
A Partnership is formed when two or more people share ownership of a single business.
The law, like that of sole proprietorships, makes no distinction between the business and its
owners. The partners should have a legal agreement that outlines how decisions will be made,
profits will be shared, disputes will be resolved, future partners will be admitted to the
partnership, partners can be bought out, and how the partnership will be dissolved if necessary.

ADVANTAGES OF PARTNERSHIP
 Simple to set up (with the exception of developing a partnership agreement)
 Separate legal status is required to provide liability protection.
 Profits are only taxed once.
 Partners' skills may be complementary.

DISADVANTAGES OF PARTNERSHIP
  Partners are jointly and severally liable for the actions of their colleagues.
 Profits must be distributed to the partners.
 Decisions are made in groups.
 If a detailed partnership agreement is not in place, the business may suffer.

Corporation
A corporation is taxed independently of its shareholders. It limits the owners' liability,
encouraging greater risk-taking and potential investment.

ADVANTAGES OF A CORPORATION
 Liability is limited.
 Shareholders can sell their shares to transfer ownership.
 The sale of stock makes it easier to raise capital.
 The company provided fringe benefits.
 Tax advantages

DISADVANTAGES OF A CORPORATION
 Taxation twice (corporation and shareholder earnings taxed)
 Forming can be costly.
 More administrative duties - required by law to hold annual meetings, notify stockholders
of the meeting, keep meeting minutes, and turn in minutes.
 Pay corporate taxes separately from other types of business.

Limited Liability Corporation

A limited liability company, or LLC, is a hybrid business structure that combines the
legal liability limitations of a corporation with the operational flexibility of a partnership or sole
proprietorship. The formation, however, is more complicated and formal than that of a general
partnership.

ADVANTAGES OF A LIMITED LIABILITY COMPANY

  The most common business structure, designed specifically for small businesses.
 Insurance is required in the event of a lawsuit.
 Legal entity distinct from others
 The number of owners is unlimited.

DISADVANTAGES OF A LIMITED LIABILITY COMPANY

 Forming can be costly.
 Annual administrative expenses
 Individual tax liability
 It is strongly advised to seek legal and accounting advice.

Selection of form of Business Organization

The crucial decision to be taken at the time of establishment of a business undertaking is the
selection of the form of organization. The following points are taken into consideration while
selecting a form of business organization.

1. Easy information
The primary consideration in making the choice is the formalities required for its formation. The
formation of business organization should be easy without many legal formalities. An
organization which involves the least expenses in formation and minimum legal formalities is the
best.

2. Easy in raising finance

Capital is the life blood of the business. Without capital we cannot even think of starting a
business. When large amount of capital is needed, Joint stock company may be the right form of
organization. But much would depend upon the facility with which finance can be raised.

3. Extent of liability
Other things being equal, limited liability is an important feature. The liability of a sole trader is
unlimited. The liability of a partnership is unlimited, joint and several, whereas the liability of a
company and a cooperative society is limited. Hence, the form of organization should be such
which restricts the liability of an entrepreneur to the minimum.

4. Flexibility of operation
A good form of business organization should allow all types of changes without any difficulty.
Sole trading concerns enjoy to the maximum extent the characteristic of flexibility of operation
followed by partnership form of organization.

5. Stability and continuity

The continuity of existence and stability are the essential factors. The company form of
organization is the only form having perpetual existence. The sole trader and partnership form of
organizations do not have a permanent life. They might be closed due to the death or retirement
of the members on any day.

6. Maintenance of secrecy
Secrecy is of prime importance in business concerns. Accordingly, the entrepreneur would select
the sole proprietorship for that reason. In case, he has partners, he will have to carefully weigh
whether other partners will be able to maintain the secrecy.

7. Government regulation
In case of sole proprietorship, the Government control is minimum. A sole proprietor
organization is not expected to meet many legal requirements. A partnership form of
organization is also free from government regulations. Even the registration of partnership is not
compulsory. But a number of formalities are required to be complied in forming a company.

8. Tax liability
The basis of taxation is different in each type of organization.

9. Ownership and control

An ideal form of organization is one which provides incentive, initiative and active interest to its
owners. This is most effectively available when management and control over business dealings
remain with the owner or owners of the business.

The above mentioned factors are inter-related and cannot be considered in isolation. The
entrepreneur will have to consider all these factors before making choice of form of business
organization.