The structure of a business organization is a critical aspect that defines its operations, ownership, and decision-making processes. Different forms of business organization have distinct features, advantages, and disadvantages. Here, we delve into various forms of business organization, highlighting their respective pros and cons.
All enterprises must have a legal framework in place that outlines the rights and duties of participants in the ownership, control, personal liability, life duration, and financial structure of the company. Because this is a long-term choice, you should get advice from an accountant and an attorney before deciding on the best ownership structure for you.
Take the following factors into consideration before making your decision:
a. Your perspective on the size and character of your company.
b. The degree of control you desire.
c. The degree to which you are willing to deal with “structure.”
d. The risk of a lawsuit being filed against the company.
e. The tax consequences of various organizational forms.
f. The business’s expected profit (or loss).
g. Whether or whether you need to reinvest profits back into the company.
h. You want to make money out of the firm for yourself.
5 Main Types/Forms of Business Organization
1. Sole proprietorship: Sole proprietorships account for the great majority of small enterprises. These businesses are frequently run by a single person, who is also the one in charge of the day-to-day operations. Sole proprietorships own the whole firm, including its assets and income. They also accept full responsibility for any liabilities or debts they may have. You and the businesses are one and the same in the eyes of the law and the public.
The Benefits of Owning a Business as a Sole Proprietor
a. The simplest and most cost-effective way to structure ownership.
b. Sole owners have entire control over their businesses and are free to make any decisions they choose within the confines of the law.
c. Profits from the company are credited to the owner’s personal tax return.
d. If needed, the company may be easily shut down.
A Sole Proprietorship Has Its Drawbacks
a. Sole owners are legally accountable for all obligations owed to the company and have limitless liability. Their personal and professional assets are in jeopardy.
b. The owner may have a difficult time acquiring finances and is frequently forced to rely on personal savings or consumer loans.
c. May have a difficult time attracting high-quality employees or those who are driven by the chance to own a piece of the company.
d. Some employee perks, such as the owner’s medical insurance costs, aren’t directly tax-deductible (only partially as an adjustment to income).
2. Partnerships: Two or more persons own a single firm in a partnership. The law does not differentiate between the business and its owners, just as it does with proprietorships. The Partners should have a written agreement stating how decisions will be taken, earnings will be distributed, conflicts will be resolved, new partners will be accepted, partners can be bought out, and the partnership will be dissolved if required.
It’s difficult to consider a “break-up” when the company is just getting started, but many partnerships break apart in times of crisis, and unless a set procedure is in place, there will be much more issues. They must also decide how much time and money they will devote to each other ahead of time.
The Benefits of a Partnership
a. Partnerships are very simple to form, although time should be spent preparing the partnership agreement.
b. The potential to generate cash is boosted if there are several owners.
c. Profits from the firm flow straight into the personal tax returns of the partners.
d. If prospective workers are offered the opportunity to become partners, they may be more interested in the company.
e. Partners with complementary abilities are typically beneficial to the firm.
Disadvantages of Partnership
a. Partners are jointly and individually accountable for the acts of their fellow partners.
b. Profits must be distributed to everybody.
c. Because choices are made jointly, conflicts may arise.
d. On tax returns, some employee benefits are not deductible from corporate revenue.
e. The relationship may have a finite lifespan; it may come to an end if one of the partners withdraws or dies.
Types of Partnerships to Consider
General Partnership: Partners distribute management and liability, as well as profit and loss shares, according to their internal agreement. Unless a formal agreement specifies otherwise, equal shares are assumed.
Limited Partnership and Limited Liability Partnership: “Limited” indicates that most partners have limited liability (to the degree of their investment) and limited influence on management decisions, which encourages investors to participate in short-term projects or capital assets. This type of ownership isn’t commonly seen in retail or service firms. A limited partnership is more difficult and formal to create than a general partnership.
Joint proprietorship: Acts in the same way as a general partnership, but for a set period of time or for a specific project. If the members in a joint venture repeat the activity, they will be considered a continuous partnership and will be required to file as such, as well as share the partnership assets after the firm is dissolved.
Corporations: By law, a corporation established by the state in which it is based is regarded as a separate and distinct entity from its owners. A corporation has the ability to be taxed, sued, and engaged in contracts. A corporation’s owners are called shareholders or investors. The shareholders elect a board of directors to oversee key policy and decision-making decisions. Changes in ownership have no impact on a corporation’s existence.
Benefits of a Corporation
Shareholders are only liable for the corporation’s obligations and judgments.
In most cases, shareholders may only be held responsible for their investment in the company’s shares. (It should be noted, however, that executives may be held personally accountable for their acts, such as failing to withhold and pay employment taxes.)
Corporations can raise cash by selling shares.
Benefits provided to officials and workers can be deducted by a company.
If certain prerequisites are completed, the company can elect S Corporation status. This option allows the corporation to be taxed in the same way as a partnership.
Disadvantages Of Corporation
The procedure of incorporation takes longer and costs more money than other types of business.
Corporations are regulated by federal, state, and municipal agencies, and as a result, they may have more paperwork to keep up with.
It is possible that incorporating will result in greater total taxes. Dividends paid to shareholders are not tax-deductible from corporate profits, resulting in double taxation.
3. Limited Liability Company (LLC): Limited liability corporations (LLCs) are business structures that combine the characteristics of a corporation with those of a partnership. An LLC is not considered a corporation because it is not incorporated. Nonetheless, just like with a business, the owners have a limited amount of responsibility. A limited liability company (LLC) can be taxed as a single proprietorship, partnership, or corporation, depending on its structure.
The Memorandum of Association explains why a company was formed. Investors with limited liability can only lose the money they have invested. Encourages individuals to invest in a business. Limited liability implies they can only recoup money from the company’s current assets. They can’t go after shareholders’ personal assets to recoup money owing to the corporation.
4. Cooperative: A cooperative society has its aims for the development of the economic interests of its members in line with cooperative principles, according to the definition. A cooperative is a for-profit enterprise owned by a group of people and run for their mutual benefit. Members are the people that make up the group. Cooperatives can be for-profit or non-profit. Water and electricity (utility) cooperatives, cooperative banking, credit unions, and housing cooperatives are all examples of cooperatives.
Cooperative societies come in several forms namely:
a. Consumer Cooperative Societies: These organizations exist to defend the interests of customers by providing high-quality consumer items at a fair price.
b. Producer’s Cooperative Societies: These organizations are founded to defend the interests of small producers and craftspeople by making products that they require for manufacturing, such as raw materials, tools, and equipment, readily available.
c. Marketing Cooperative Societies: Small producers get together to create marketing cooperative societies to handle the challenge of product marketing.
d. Homes Cooperative Societies: Housing cooperative societies are founded in metropolitan areas to offer residential housing for their members. Small farmers create farming cooperative associations in order to reap the benefits of large-scale farming.
e. Credit Cooperative Societies: These organizations are founded by people who need credit. They take deposits from members and lend them money at a reasonable interest rate.
Merits of cooperative society
a. Simple to form, with limited responsibility
b. Membership is open to everyone.
c. Assistance from the government
d. Tax breaks for a long life
e. Limitations of Democratic Management
Limitations to a cooperative society
a. Limited Capital Management Skill Deficit
b. Motivation is low.
c. A lack of enthusiasm
d. Dependence on the government.
5. Series LLC: Series LLCs are a growing type of corporate ownership structure that are currently recognized in 18 states. They essentially allow for the subsidiary establishment of several internal LLCs from a single parent LLC. These stacked LLCs can be used to divide the obligations of various corporate entities.
Even though individual series LLCs are complicated, they are worth exploring with your legal advisor if your company has unique components that could benefit from them.
The advantages of a series LLC
Series LLCs provide a number of benefits, such as:
a. Really limited liability: Each LLC in a series has a different set of members, assets, and liabilities.
b. Owner involvement: Series LLCs allow owners to actively participate in the management of each of their unique LLCs.
c. Tax options: The tax advantages and adaptability of traditional LLCs are still available to series LLCs.
Despite having multiple LLCs, a series LLC only needs to register and submit taxes once through the parent LLC. The registrations and returns are still more challenging than for a single LLC, though, because all LLCs must be included.
Aseries LLC’s negative aspects
For LLC Series LLCs, the ensuing limitations are valid:
a. Complexity: Maintaining numerous LLCs with different assets and owners is much more challenging than managing a single entity, despite the unified filing format. Taxes present unique challenges for the series structure.
b. Costs related to administration Additional costs and help from knowledgeable experts are required due to the increased administrative complexity. Costs associated with creating a series LLC could also go up.
After considering a number of variables, an effective organizational structure may be chosen. Initial costs, liability, continuity, capital concerns, management competence, degree of control, and the nature of the firm are all important aspects to consider while deciding on the best organizational structure for one’s company.