Forms of Business Organization

THE ORGANIZATION OF THE BUSINESS FIRM

The business firm is an entity designed to organize raw materials, labor, and machines with the
goal of producing goods or services firms.

1. Purchase productive resources from households and other firms.

2. Transform them into a different commodity.

3. Sell the transformed product or service to consumers.

For business firms engaged in retail or trading activities, transforming purchased goods into a
different commodity does not necessarily take place.

Every society, no matter what types of economy it has, relies on business firms to organize
resources and transform them into products. In market economics, most firms choose their own price,
output level, and methods of production. They get the benefits of sales revenues, but they also must pay
the costs of the resources they use.

Business firms can be organized in one of three ways as a Proprietorship, Partnership or a

corporation. The structure chosen determine how the owners share the risks and liabilities of the firm and
how they participate in making decisions.

LEGAL FORMS OF BUSINESS ORGANIZATION

Proprietorship

A sole proprietorship is a business owned by a single person who has the control over business
decisions. This individual owns all the firm’s assets
 Advantage of sole proprietorship:

1. Ease of entry and exit

A Sole proprietorship requires no formal charter and is inexpensive to form and dissolve.

2. Full ownership and control

The ownership and control, reaps all profits and bears all losses.

3. Tax Savings

The entire income generated by the proprietorship passes directly to the owner. This may result
in a tax advantage if the owner tax rate is less than the tax rate of corporation.

4. Few government regulations

A sole proprietorship has the greatest freedom as compared with May form of business
organization.

Disadvantage of sole proprietorship:

1. Unlimited liability

The owner is personally liable or responsible for any and all business debts. Thus the owners
personal assets can be claimed by the creditors if the defaults on its obligations.

2. Limitation in raising capital

Fund-raising ability is limited. Resources may be limited to the assets of the owner and growth
may depend on his or her ability to borrow money.

3. Lack of continuity

Upon death or retirements of the owner, the proprietorship ceases to exist.

The proprietorship may be an ideal form of business organization when the following condition exists:

- The anticipated risk is minimum adequately covered by insurance.

- The owner is either unable or unwilling to maintain the necessary organizational documents and
tax returns of more complicated business entities.
- The business does not require extensive borrowing.

PARTNERSHIP

A partnership is a legal arrangement in which two or more persons agree to contribute capital or
services to the business and divide the profits or losses that may be derived therefrom. Partnership may
operate under varying degrees of formality.

PARTNERSHIP IS EITHER GENERAL OR LIMITED

General partnership

Is one in which each partner has unlimited liability for the debts incurred by the business. General
partners usually manage the firms and may enter into contractual obligation on the firm’s behalf. Profits
and assets ownership may be divided in any way agreed upon by the partners.

Limited partnership

It is containing one or more general partner and one or more limited partner. The personal liability
of the general partner for the firm’s debt is unlimited whiles the personal liability of limited to their
investment. Limited partners cannot be active in management.

Advantages of a partnership

1. Ease of formation

Forming a partnership may require relatively little efforts little efforts and low start-up costs.

2. Additional sources of capital

A partnership has the financial resources of several individuals.

3. Management base

A partnership has a broader management base or expertise than a sole proprietorship.

4. Tax implication

A partnership like a proprietorship does not pay any income taxes. The income or loss of the
business is distributed among the partner reports his or her portion whether distributed or not on
personal income tax return.

DISADVANTAGES OF PARTNERSHIP

1. Unlimited liability

General partners have unlimited liability for the debts and litigation of the business.

2. Lack of continuity

A partnership may dissolve upon the withdrawal or death of a general partner, depending on the
provisions of the partnership.

3. Difficulty of transferring ownership

It is difficult for a partner to liquidate or transfer ownership. It varies with conditions set forth in
the partnership agreement.

4. Limitation in raising capital

A partnership may have problem raising large amounts of capital because many sources of funds
are available only to corporation.

CORPORATION
A firm that meets certain legal requirements to be recognized as having a legal existence , as an entity
separate and distinct from its owners. Corporations are owned by their stockholders (shareholders) who
share in profits and losses generated through the firms operation.

The incorporation process is initiated by filing the articles of incorporation and other requirements with
the Securities and Exchange Commission (SEC). The articles of incorporation includes among others the
following.

- Incorporation - purpose of the corporation - Authorized shares

- Name of the corporation - Capital Stock

Advantage of a corporation

1. Limited liability

Shareholders are liable only to the extent of their investment in the corporation. Thus, shareholders can
only lease what they have invested in the firms share not any personal asset. Limited liability is not all
encompassing. Government may pass through the corporate shield to collect unpaid taxes. It is not
uncommon for creditors to require that major shareholders personally co-sign for credit extended to the
corporation. Thus upon default by the business. The creditors may sue both the corporation and
shareholders who have co-signed.

2. Source of capital

A publicly-held corporation in particular can raise substantial amounts by selling share or issuing
bonds.

3. Ownership transfers

It is not especially difficult for a shareholder to sell shares in a corporation, though this is more
difficult when the entity is privately-held.

4. Perpetual life

There is no limit the life of a corporation, since ownership of it can pass through many generation
of investors.

5. Pass through

If the corporation is structured as an S corporation, profits and losses are passed through to the
shareholders, so that the corporation does not pay income taxes.

Disadvantage of a corporation
1. Double taxation

Depending on the type of corporation, it may pay taxes on its income, after which shareholders
pay taxes on any dividends received, so income can be taxed twice.

2. Excessive tax filings

Depending on the kind of corporation, the various types of income and other taxes that must be
paid can require a substantial amount of paperwork. The exception to this scenario is the S corporation,
as noted earlier.

3. Independent management

If there are many investors having no clear majority interest, the management team of a
corporation can operate the business without any real oversight from the owners.