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18/05/2018 11:40:22 PM

Forms of Business organizations

Business organizations include four main forms: sole proprietorships, partnerships, corporations, and limited liability companies (LLCs) and limited liability partnerships (LLPs)

            A proprietorship or a sole enterprise is an unincorporated business owned by only one individual. Going into business as a sole proprietor is easy a person begins business oper­ations. Proprietorships have three important advantages:

                  - Easily and inexpensively formed,

                  - Few government regulations,

                  - Lower income taxes than are corporations.

            However, pro­prietorships also have three important limitations:

-   Proprietors have unlimited personal liability for the business's debts, so they can lose more than the amount of money they invested in the company.

-   The life of the business is limited to the life of the individual who created it; and to bring in new equity, investors require a change in the structure of the business.

-   Proprietorships have difficulty obtaining large sums of capital; hence, proprietorships are used primarily for small businesses.

            A partnership is a legal arrangement between two or more people who decide to do business together. Partnerships are similar to proprietorships in that they can be established relatively easily and inexpensively. Moreover, the firm's income is allocated on a pro rata basis to the partners and is taxed on an individual basis. This allows the firm to avoid the corporate income tax. However, all of the partners are generally subject to unlimited personal liability, which means that if a partnership goes bankrupt and any partner is unable to meet his or her pro rata share of the firm's liabilities, the remaining partners will be responsible for making good on the unsatisfied claims. Unlimited liability makes it difficult for part­nerships to raise large amounts of capital.

            A corporation is a legal entity created by a state, and it is separate and distinct from its owners and managers. It is this separation that limits stockholders' losses to the amount they invested in the firm—the corporation can lose all of its money, but its owners can lose only the funds that they invested in the company. Corporations also have unlimited lives, and it is easier to transfer shares of stock in a corporation than one's interest in an unincorporated business. These factors make it much easier for corporations to raise the capital necessary to operate large businesses.

            A limited liability company (LLC) or a limited partnership company (LLP) is a relatively new type of organization that is a hybrid between a partnership and a corporation. The main diferrence between them is that LLP forcus on professional fields such as accounting, law, architecture while LLC operates in the remaining areas.

 

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