Business organizations

There are three major kinds of business organizations: the sole proprietorship², the partnership³ and the corporation⁴.

The most common form of business organization is the sole proprietorship — a business owned and run by one person. The main advantage of a sole proprietorship is that it is the easiest form of business to start and run. There is almost no red tape⁵ involved. In the event that the owner wants to dissolve the business⁶, a sole proprietorship is as easily dissolved as it is formed.

Sole proprietors own all the profits of their enterprises and are free to make whatever changes they please. They have minimal legal restrictions and do not have to pay the special taxes placed on corporations. They also have the opportunity to achieve success⁷ and recognition through their individual efforts.

The major disadvantage of a sole proprietorship is the unlimited liability⁸ that each proprietor faces. Since the business and the owner are legally the same, the sole proprietor is liable for⁹ all financial losses or debts that the business may incur.

A second disadvantage of the sole proprietorship is that it has limited financial resources.

When the owner dies, the business also legally terminates.

A partnership is a business that is jointly owned by two or more people who have combined their talents and resources for the purpose of earning a profit. The most common form of partnership is a general partnership³. General partners own the business, work in it and share the profits and losses. They are responsible for the management of the business and usually agree with each other before making any major decisions.

There may be a special type of partnership, called limited partnership⁴. Limited partners are only liable for the amount they have invested in the business. They are usually not involved in the management of the firm.

Partnerships have more advantages than sole proprietorships. Like sole proprietorship they are easy to form and often get tax benefits⁵ from the government.

Partnerships have certain disadvantages too. The major disadvantage is unlimited financial liability. It means that each partner is responsible for all debts and is legally responsible for the whole business. But one of the greatest problems in partnerships is that partners may disagree with each other causing management conflicts.

Nearly 90 per cent of all business is done by corporations. A business corporation is an institution established for the purpose of making profit. It is operated by individuals. People, who would like to form a corporation, must file for permission¹ in the state where the business will have its headquarters. There are several advantages of the corporate form of ownership. The major advantage is the ability to acquire greater financial resources than other forms of ownership. The next advantage is that the corporation attracts a large amount of capital and can invest it in plants, equipment and research. It can offer higher salaries and thus attract talented managers and specialists. Corporations have great capacity for growth and expansion.

Corporations face some major disadvantages. It is difficult and expensive to organize a corporation. The process of obtaining a charter usually requires the services of a lawyer. Most small firms prefer to avoid these expenses by forming proprietorships and partnerships. There is also an extra tax on corporate profits.