Source: Valuation Academy
It is important to understand the different types of business organizations types such as a sole proprietorship, partnership, and corporation. A business’s organizational structure influences issues, legal issues, financial concerns, and personal concerns.
A Sole Proprietorship is a business with one owner who operates the business on his or her own or employ employees. It is the simplest and the most numerous form of business organization in the United States, however it is dangerous as the sole proprietor has total and unlimited liability. Self contractor is one example of a sole proprietorship.
Advantages of a sole proprietorship
- Simplest and least expensive form of business to establish and to dissolve.
- The owner is making all the decisions and controlling the whole operations.
- All profit flows directly to the owner.
- It is subject to fewer regulations.
- It has tax advantage: any income is declared as the owner’s personal income tax return, therefore there are no corporate income taxes.
Disadvantages of a sole proprietorship
- The owner is responsible for all the obligations of the business.
- It is difficult to raise capital: it can only use the owner’s personal saving and consumer loans.
A Partnership is a business with two or more individuals owns and manages the business. Partners share the unlimited liabilities of the business and operate the business together. There are three classification of partnerships: general partnership (partner divide responsibility, liability and profit or loss according to their agreement), limited partnership (in additional at least one general partner, there are one or more limited partner who have limited liability to the extent of their investment), and limited liability partnership (all of the partners have limited liability of the business debts; it has no general partners).
Advantages of a partnership
- It is relatively easy to form but considerable amount of time should be invested in developing the partnership agreement.
- It is easier to raise capital compared to a sole proprietorship as there are more than one investor.
- Any income is declared as the partners’ personal income tax returns, therefore there are no corporate income taxes.
- Employees may be motivated and attracted to the business by the inventive to become a partner
Disadvantages of a partnership
- Partners are jointly responsible for all the obligations of the business.
- Partners must make decision together therefore disputes or conflicts may occur. It may eventually lead to dissolving the partnership.
A corporation is a limited liability entity doing business owned by multiple shareholders and is overseen by a board of directors elected by the shareholders. It is distinct from its owners and can borrow money, enter into contracts, pay taxes and be sued. The shareholders gain from the profit through dividend or appreciation of the stocks but are not responsible for the company’s debts.
Advantages of a corporation
- It can raise additional funds through the sale of stock.
- Shareholders can easily transfer the ownership by selling their stock.
- Individual owner’ liability is limited to the value of stock they are holding in the corporation.
Disadvantages of a corporation
- It is restricted by more regulations, more closely monitored by governmental agencies and are more costly to incorporate than other forms of the organizations.
- Profit of the business is taxed by the corporate tax rate. Dividends paid to shareholders are not deductible from corporate income, so this part of income is taxed twice as the shareholders must declare dividends as their personal income and pay personal income taxes too.