First let’s understand the term what is business?
Business is an activity of making money by producing or buying or selling products or goods.
What is Business Organization?
The term business organization means how a business is built and how its structure helps them to meet its goals. In other words, business is designed to generate profit or improvement of society. When a business generates profit, it is called a for-profit organization. The other one is a non-profit organization in which the organization focuses on improving socially through arts, education, health care, or some other area. And it is not a business.
There are various types of business organizations that are related to how the business is established and owned. The basic categories of business are sole proprietorship, partnership, and corporation. All business organizations have some benefits and disadvantages. For example, a sole proprietor will operate independently much of the government regulation that affects larger business, but he is responsible for the financial risk of the business. Therefore, he is responsible for all profits and losses of a business.
There is a certain risk in business as it operates. There is one way by which we can minimize the risk to use its assets and invest wisely whether it is knowledge, property, or equipment. If you use your assets wisely there is a chance to make more profit in business.
There are certain rules of government to operate any business. State and federal governments provide incentives for every type of business. If a business is profitable it can help to grow the country’s economy, so government generally helps or support it by passing laws that protect investors from debts of the business. Alining your goals to your business is very important so understanding the pros and cons is important.
The formation of the company will affect:
How you are taxed
Your legal liability
Cost of formation
There are 4 main types of business organizations
- Sole proprietorship
- Limited liability company
We will see an explanation for each of them.
The business is run and owned by someone for their benefit. This is the most simple and common form of business ownership. The existence of a business is dependent on the owner’s decision. So, when the owner dies so the business also shuts off.
Advantages of the sole proprietorship
There are very few regulations and rules for proprietorship.
Very few requirements to start a business mainly a license.
Owners have flexibility in running the business.
All profits are subject to the owner.
Ownership of proprietorship is difficult to transfer.
Equity is limited to the owner’s resources.
The owner is 100% liable for business debts
There is no difference between personal and business income.
There are two types of partnership general and limited.
In a general partnership, both owners invest their money in property and labour and both are liable for business debts 100%. In other words, even if you invest less in a general partnership, you are still responsible for all debts.no agreement is required in a general partnership it can be verbal.
A limited partnership requires a formal agreement between partners. A limited partnership allows partners to limit their liability for business debts. According to their portion of ownership or investment, they must also file a certificate of partnership with the state.
Advantages of partnership:
- Each partner shares the total profits of the company.
- Whether formal or informal, it is inexpensive to establish a business partnership.
- Shared resources provide more capital for the business.
- Similar flexibility and simple design of a proprietorship.
- Every partner of the company is 100% responsible for the debts and losses.
- Selling a business is difficult, it requires finding a new partner.
- The partnership ends when a partner decides to end it.
Corporations are considered legal persons for tax purposes, separate entities. This means the profit generated by a corporation is taxed as the “personal income” of the company. Then any income distributed between the owners or shareholders is taxed as the personal income of the owner.
Advantages of the corporation:
- Can be transferred to the new owners easily.
- Personal assets cannot be used to pay for business debts
- Limits liability of the owner to losses.
- Profits and losses belong to the corporation.
- Corporate operations are expensive
- It is expensive to establish a corporation
- Paperwork is complex to start a corporate business
- Corporate income is taxed twice
Limited Liability Company (LLC)
LLC provides limited liability to the owners while providing some of the income advantages of a partnership just as a limited partnership. The advantages of partnership corporations are combined in LLC.
Advantages of an LLC
- Limited liability to the owners of the company for debts
- The profits are shared without double taxation by the owners in LLC.
- By certain laws ownership is limited
- Agreements must be complex
- Due to the legal and filing fees begun an LLC is costly.
All these points are important for the business organization.