Essay on Forms of Business Organizations

Businesses are significant in peoples daily lives due to increased competition and globalisation. They take various forms due to factors like the organisations purpose, startup costs, the entitys size, taxation involved, and the State laws that govern businesses. They can take the form of sole proprietorships, partnerships, limited liability Companies, or corporations. Hence, an in-depth analysis of each form must be made to ensure entrepreneurs attain their business intentions.

Sole Proprietorship

It is often utilized by one person running or owning a business on their own or with the help of employees. It is inclusive of businesses by lawyers, physicians, retailers, and electricians. It is the easiest form of business organisation because fewer forms are filed during its foundation. Moreover, less capital is required for it to commence. Also, its structure does not require legal documentation on the allocation of profits as the business is not distinguished from the owner. However, according to Mitchell LLP, 2015 the business name can be different from the owners name, but registration must be done at the Province. An example of a name for a sole proprietorship business can be Jarrod & Sons Enterprise. The owner has the responsibility to bear the liabilities, losses, profits, and assets emanating from the business. Businesses involving high risks should not opt for sole proprietorships because they expose personal assets to risk. For example, child and animal care businesses, and the selling of foodstuffs. This is especially when debt is used as the start-up capital. In such a case, the owner can be sued and personal property taken to cover the unpaid debt. Nonetheless, an insurance policy can be taken to ensure the owner works peacefully.

It is advantageous because decision-making takes a short time as one person does it. Also, it involves a simple tax returns procedure as the owner remits the returns of the business within their personal income form. As such, it does not entail double taxation as profits are not taxed at the business and personal levels, but at the personal level only. Additionally, the needs of customers are well met due to the nearness and quick response. Conversely, it is disadvantageous since it is not a distinct business entity. As such, its existence stops when the owner is disabled or dies. Besides, chances of making uninformed decisions are high since only one person is involved in the decision-making process. Lastly, it is challenging to raise capital since investors are less interested in sole proprietorships.

Partnership

This is a form of business organisation where individuals cooperate by entering into contracts with the intention to combine activities, knowledge, or property and manage them to share both risks and profits. This is a good option if a person does not want to be a sole proprietor. Blackwell LLP, 2016 indicates that partnerships occur in different types including limited partnerships, general partnerships, and limited liability partnerships. The operation of the business is by the partnership agreement. It stipulates the partners identity, their responsibilities and roles, and their profit-sharing ratio. The partners share the losses and profits and get taxed on an individual basis. They are unincorporated implying that they are cheaper to start unlike corporations (Mitchell LLP, 2015). They exist in the form of professional practices like CPA firms and as retail establishments. An example of a partnership is the Cassels Brock Lawyers located in Toronto, Vancouver, and Calgary.

General Partnerships

Within this formation, all partners are individually liable for the debts of the business beyond the amount of their investment. As such, it is disadvantageous since the partners property can be taken to cover the debt. Also, any of the partners can be entirely accountable for the business, and any of them can make decisions that influence the entire business. Moreover, all of them equally take part in the management of the business (Blackwell LLP, 2016). It is not a taxable entity as the equally distributed losses, and profits are handed to the partners who report the returns on personal tax returns.

Limited partnerships

This is where one partner, a general partner, makes decisions and is liable for the debts of the business while the others, limited partners, only invest. Each of them is answerable to the extent of their investment. This is advantageous because minimum registered capital is not required. Hence, the startup costs are low. The mutual trust of knowing each other as relatives, friends, or workmates improves the process of management (Blackwell LLP, 2016). However, it is disadvantageous because general partners are considered the partnerships agents. Therefore, all general partners are liable for their transactions with third persons.

Limited Liability Partnerships

They are mainly used by professionals like lawyers, accountants, and doctors. It shields each partners assets. Also, it protects each partner from liability or debt incurred by the others. As such, only the business entity is responsible for the debts. Taxation is done at the individual level (Blackwell LLP, 2016). Moreover, they pay fees and file paperwork like those in the establishment of limited liability companies.

Limited Liability Company (LLC)

This is a company whereby the subscribers or members liability is limited to what they have guaranteed or invested. As such, an individuals assets are protected from financial liability, while the investor gets shielded from certain personal liability. However, the investor can become liable if they do a fraudulent transaction intentionally, or if they fail to separate business from personal affairs. LLCs are seen as a blend of corporate and partnership structures, and they are based on state laws. Consequently, they lack exceptional federal tax forms implying that they can choose to be taxed as a partnership, an individual, or a corporation. To form this business, paperwork including articles of organisation are filed with the state secretary together with some fees. Moreover, there is some need to form an operating agreement to indicate each investors ratio in the business, voting power, responsibilities, the sharing of losses and profits, and what transpires if an owner wishes to sell their ratio or when a new member wishes to join. Also, a notice of the formation of the LLC can be published in the local newspaper. An example of such a business is the Chrysler LLC in the motor vehicle industry in Auburn Hills.

Corporations

These are businesses created based on the corporate law of a state. They exist distinctly from its subscribers known as the stockholders or shareholders whose possession interests are known as stock. As such, the corporation can sue or be sued, transact, enter into contracts, and pay taxes separately from the owners. It is expensive to start and sustain as compared to other forms. The shareholders are not involved in the direct management of the corporation, but a board of directors is elected to represent them. To be formed, an incorporator requires a business name, files the articles of incorporation, and pays the filing fees. The articles of incorporation outline the internal affairs of management, the purpose of the business, maintain a record of the firms creation, and the businesses flexibility to evolve and grow. Mitchell LLP, 2015 holds that corporations have the advantage of limited liability as the personal assets of the shareholders cannot be taken in case of liabilities or debts. Also, the corporate taxes paid are comparatively low especially if the profits are huge. Their large nature and structure enable them to attract skilled and talented employees and large investors with ease. Additionally, the transfer of shares can be done freely and they can exist to perpetuity or can have a limited duration. Corporations are disadvantageous due to high incorporation costs, compulsory legal bureaucracies like the disclosure of the books of account, enormous paperwork in their running, and the need to disclose the names of the officers and directors. Besides, it is a long and expensive process to dissolve a corporation. There are two types of corporations; the C corporations, which pay taxes separately, while the S corporations, which have their taxes paid by the individual shareholders. Apple Inc. and Microsoft Corporation are examples of successful corporations.

Conclusion

To sum up, there are various forms of business organisation. A right form is required to ensure the entrepreneur is protected from liabilities. The various forms include sole proprietorship, partnership, limited liability Company, and Corporation. Sole proprietorship involves a single owner who can run a business solely or through the help of employees. It is the easiest to form due to less paperwork and low startup capital. Also, partnerships exist and are formed when entrepreneurs enter into contracts to run a business and share the profits and losses. They can exist as general partnerships, limited partnerships, or limited liability partnerships. Moreover, one can indulge in the limited liability company whereby their liability would be limited to their contribution to the business. As such, their personal property cannot be taken in case of financial liabilities. Finally, corporations are those business entities whose formation bases on a states corporate law. They exist independently as artificial legal persons that can carry out transactions. They are expensive to form and require a lot of paperwork.

References

Blackwell LLP, C. (2016). Forms of Business Organization. 1st ed. [PDF] Toronto: Cassels Brock & Blackwell LLP. Available at: http://www.casselsbrock.com/files/file/docs/CasselsBrock_DBIC_FormsofBusiness.pdf [Accessed 29 Jun. 2017].

MITCHELL LLP, P. (2015). Forms of Business Organization. 2nd ed. [PDF] Kelowna, pp.1-3. Available at: http://www.pushormitchell.com/files/articles/Forms%20of%20Business%20Organization.pdf [Accessed 29 Jun. 2017].