Forms of Business Organization

These are the basic forms of business ownership:

Sole Proprietorship -​72% of businesses

A sole proprietorship is a business owned by only one person. It is easy to set-up and is the least
costly among all forms of ownership. The owner faces ​unlimited liability​; meaning, the creditors
of the business may go after the personal assets of the owner if the business cannot pay them.

The sole proprietorship form is usually adopted by small business entities.

Advantages of sole proprietorships

·​ Ease of start up
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·​ Ease of Management
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·​ You keep all profits

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·​ You do not have to pay any business taxes

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·​ Psychological advantages
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·​ Ease of exit
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Disadvantages, Economic Weakness of sole proprietorship

·​ Unlimited Liability: you have total responsibility for all debts and liabilities of the
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company

·​ Difficulty in raising financial capital

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·​ Limited size and efficiency

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·​ Limited managerial experience

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·​ Limited Life
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Partnership

A partnership is a business owned by two or more persons who contribute resources into the
entity. The partners divide the profits of the business among themselves.
In ​general partnerships,​ all partners have unlimited liability. In ​limited partnerships,​ creditors
cannot go after the personal assets of the limited partners.

Two major types of partnerships:

General Partnership: (most common type) all partners are responsible for management and the
financial responsibilities of the partnership.

Limited Partnership: at least one partner is not active in the day to day running of the business.
They have limited liability.

Contract between partners- partnership agreement is spelling out the rules of partnership:

Dividing profit

Dividing responsibility

Admitting new partners

Buying out partners

Advantages of Partnerships:

·​ Ease of establishment
​

Ease of Management: each partner has different things to offer

·​ No special business taxes

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·​ Easier to raise financial capital

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·​ Larger than sole proprietorship

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·​ Easier to attract qualified workers

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Disadvantages of Partnerships
·​ Unlimited liability
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·​ Limited partner is only responsible for his initial investment.

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·​ He has limited liability.

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·​ Limited Life
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·​ Conflict between partners

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Corporation

A corporation is a business organization that has a separate legal personality from its owners.
Ownership in a stock corporation is represented by ​shares of stock​.

The owners (stockholders) enjoy limited liability but have limited involvement in the company's
operations. The ​board of directors,​ an elected group from the ​stockholders,​ controls the activities
of the corporation.

In addition to those basic forms of business ownership, these are some other types of
organizations that are common today

·​ Advantages of a corporation:
​

Ease of raising financial capital (main advantage)

·​ Selling stock to investors

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·​ Selling bonds: a written promise to repay a loan on a specific date

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·​ Principal: the amount borrowed

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·​ Interest: the price paid for the use of another’s money

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·​ Borrowing money from banks

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·​ Ability to hire
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·​ Limited liability
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 ·​ Unlimited life
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·​ Ease of transferring ownership:

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·​ Buying and selling stock is easy and is done millions of times a day
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Disadvantages of a corporation:

·​ Startup expenses are high.

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·​ Stockholders (owners) have a limited

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·​ Profits are taxed

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·​ Corporations are subject to more government regulations than sole proprietors or

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partners

Limited Liability Company

​ LCs) in the USA, are hybrid forms of business that have
Limited liability companies (L
characteristics of both a corporation and a partnership. An LLC is not incorporated; hence, it is
not considered a corporation. But, the owners enjoy limited liability like in a corporation. An
LLC may elect to be taxed as a sole proprietorship, a partnership, or a corporation.

Advantages of LLC:

● No restrictions on the number of members allowed

● Members have flexibility in structuring the company management
● Does not require as much annual paperwork or have as many formalities as corporations.
● Owners are not personally responsible for business debts and liabilities

Disadvantages of an LLC:

● More expensive to form than sole proprietorships and general partnership,

● Ownership is typically harder to transfer than with a corporation
● Limited Life
Cooperative

A cooperative is a business organization owned by a group of individuals and is operated for

their mutual benefit. The persons making up the group are called ​members​.

Some examples of cooperatives are: water and electricity (utility) cooperatives, cooperative
banking, credit unions, and housing cooperatives.

Advantages of a co-operative

Members own and control the business

·​ Members share the start-up costs and the running of the business
​

·​ They share the financial risk

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·​ Members may pay less for goods and services and get more for those they sell
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​Disadvantages of a co-operative

·​ Because each member only has one vote, members may not want to invest money for
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expansion

·​ Because of the number of members, making decisions can be difficult

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·​ Members can have conflicts

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Franchise
A franchise is a type of license that grants a franchisee access to a franchisor's proprietary
business knowledge, processes and trademarks, thus allowing the franchisee to sell a product
or service under the franchisor's business name. In exchange for acquiring a franchise, the
franchisee usually pays the franchisor an initial start-up fee and annual.

Advantages of a franchise

·​ ​Franchisees buy a business with a good reputation

·​ ​Franchisors supply training and financial knowledge
·​ ​Franchisors usually provide packaging, advertising, and equipment to the franchisee

Disadvantages of a Franchise
 ·​ ​Franchises can be expensive to buy
·​ ​Franchisees may have to follow a lot of rules laid down by the franchisors
·​ ​If a franchisor’s business fails, so will the franchisee’s business

Franchise vs. Startup

If you don't want to run a business based on someone else's idea, you can start your own. But
starting your own company is risky, though it offers rewards both monetary and personal. When
you start your own business, you're on your own. Much is unknown. ​Will my product sell? Will
customers like what I have to offer? Will I make enough money to survive?

The failure rate for new businesses is high. Roughly 20% of startups don't survive the first year.
About 50% last until year five, while just 30% are still in business after 10 years. ​ If your
business is going to beat the odds, you alone can make that happen. To turn your dream into
reality, expect to work long and hard hours with no support or expert training. If you venture out
solo with little or no experience, the deck is stacked against you. If this sounds like too big a
burden, the franchise route may be a wiser choice.

People typically purchase a franchise because they see other franchisees' success stories.
Franchises offer careful entrepreneurs a stable, tested model for running a successful business.
On the other hand, for entrepreneurs with a big idea and a solid understanding of how to run a
business, launching your own ​startup​ presents an opportunity for personal and financial
freedom. Deciding which model is right for you is a choice only you can make.