What Form of Business Organization Works Best?
This article looks at three forms of business organizations and their pros and cons.
What Form of Business Organization Works Best?
There are several forms of business organizations. This article looks at the pros and cons of three out of them – Sole Proprietorship, Partnership and Corporation.
Sole Proprietorship
Sole proprietorship is considered the oldest form of business organization. Since it has such a simple set up, it is among the more preferred forms too. In a sole proprietorship, the entire business is managed by one person, who looks after the operations, and financial and legal aspects.
There aren’t many state or federal regulations concerning a sole proprietorship and there are fewer hassles in managing and controlling it.
Advantages
o Easier to set up
o Start-up costs are lower and working capital required is minimal
o Less need for paper work
o Decision making depends on only one person
o Owner gets tax advantages and all the profits
Disadvantages
o Raising the capital might be difficult
o Owner takes on unlimited liability
o Business continuity may be affected when the owner is absent
Partnership
A partnership is a business organization owned by two or more people, who share the profits and losses among each other. There are two kinds of partnerships – general and limited. In a general partnership, the assets, liabilities, profits and losses are jointly owned by two or more people. Each partner gets some tax allowances and legally owns the assets of the business.
A limited partnership, on the other hand has a combination of one or more general partners and limited partners. The responsibilities of the limited partners’ are clearly spelled out in a legal agreement.
Advantages
o It’s easy to form and has low start-up costs
o There is an additional source of investment
o Risk is divided among two or more people
Disadvantages
o General partners assume unlimited liabilities
o Possibility of conflict of interest and fall out
Corporation
A Corporation is a form of business organization that is owned by the stakeholders or investors. Closely held corporations have a single shareholder while publicly traded company can have hundreds of shareholders. The day to day working of the corporation is carried out by the board of directors. This board is elected by the shareholders in an annual meeting.
Advantages
o The ownership of the business entity is transferable
o Raising capital is easier
o It has a specialized management structure
Disadvantages
o There is need for extensive documentation for the purpose of maintaining records
o Dividends are subject to double taxation
o It’s very closely regulated
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