Forms of business organizations

Forms of organizations refer to the legal pattern of ownership structure. The forms of business organization are mainly classified into three forms: sole proprietorships, partnership firms, and companies or corporations.

1. Sole proprietorships:

A business organization that is owned, managed, and controlled by a single individual is called sole proprietorships or sole trading concerns. It is a one-person enterprise, where a single person invests his/her capital at their own risk and shares all the profits or losses solely. 

Advantages of sole proprietorships are listed below:

• Easy to establish because it requires fewer legal and financial decisions.
• All profits belong to the owner.
• Can be operated with small capital as well.
• Offers a relatively high degree of flexibility in the decision-making process because the owner is free to take any decision without facing any interferences.

However, it has some disadvantages as well.

Disadvantages of sole proprietorships are listed below:

• The single-owner may not have enough capital organization, and insufficient skill and efficiency to operate the business.
• There is no guarantee of financial liability, so if the business goes broke, the single-owner will have to face all the losses and may cause bankruptcy.
• The business goes dead suddenly after the death of the owner. 

2. Partnership firm:

A business organization that is owned, managed, and controlled by two or more individuals is called a partnership firm. 

In other words, the individuals, known as partners, contribute capital jointly and manage the firm as per the partnership deed. A partnership deed is a legal document of agreement between parties. It spells out the ratio of capital investment and profit-sharing along with the participating role of the partners in the management and control of the partnership firm.

Advantages of Partnership firm are listed below:

• It is not subject to corporate income tax.
• It is also easy to form.
• It ensures a larger capital investment than a sole proprietorship.

However, it also has some disadvantages, they are listed below:

• The partners have unlimited financial obligations.
• The firm has a limited life as it depends on the life of the partners.
• It also lacks sufficient capital as compared to corporate forms of business organization. In case of bankruptcy, partners have to face losses from their personal property. So, they have no proper liability backup of their business.

3. Companies or Corporations

A business organization that is created by the law of the state with distinct existence from its owners and managers and with the limited financial liability of the owners. So, it is a voluntary association of individuals with limited financial liability which overcomes the drawbacks of sole proprietorships and partnership firms.

Advantages of Corporation form of business organization are listed below:

• It has unlimited life in the sense that its life is not dependent on the life of managers and owners.
• It is operated with the limited financial obligations of owners. The owners, also called shareholders are not made personally liable to meet corporate liabilities if the corporation goes into bankruptcy. Shareholders are limited to the face value of shares invested by them.
• The limited financial liability feature of the corporation reduces the risk to the shareholders.
• The transfer of ownership is easy. The shares can be sold at any time.

The above advantages make it the most powerful form of business organization. However, it has also some disadvantages.

Some Disadvantages of Corporation firm are listed below:

a. Corporate earnings are subject to double taxation. It is taxed at the corporate income tax rate and then it also falls into individual taxation of the shareholders when earnings are distributed as dividends. The dividend is the portion of earnings distributed to shareholders.

b. It requires more legal formalities to incorporate (start a business). The promoters, who initiate to establish a corporation, have to file applications to the concerned authority along with a memorandum of association and article of association.

A memorandum, of association, is the main law of the corporation which spells out the name of the proposed corporation, the line of business it will operate, the amount of authorized capital, the number of directors, the name and address of directors, and so on. The article of association is prepared on the basis of a memorandum. It spells out the rules and regulations associated with the internal management of the corporation.