Having a good knowledge of the forms and types of business organization is crucial when starting a business. As an individual who is on the verge of establishing his own business venture, one of the earliest decisions you’ll make is to decide on the types of business organization you’ll venture into. You also need to understand the pros and cons of each different forms of business organization in other to create a profitable business.
Thus, this decision will have a long-term implication on your business; so it is advisable you consult a professional if you read this article till the end and still not sure of the kind of business structure that might work best for your company.
What is Business Organization?
A business organization is an organization or legal entity that uses economic material to provide goods or render services to its prospective customers in exchange for legal tender, money, or any other commodities, goods, and services.
Check Also: Types of Advertising Media
All business organizations bore common goals and objectives: they are profits oriented. The different forms of business organization include; Sole Proprietorship, Partnership, Corporation, Corporative, “S” Corporation, Limited Liability Company, etc.
Every business—whether old or new, must abide by some rules of legal configuration that explain the strengths, liabilities, and rights of participants in a particular business’s lifespan, personal control, and financial structure.
The types of business organization tell and determine the kinds of strength, tax return, skills, products, and owner’s legal liabilities towards a particular venture to be created.
There are, however, four distinct types of business structure, and they are as follows:
Types of Business Organization
1. Service Business
A business venture that is established for the purpose of providing an intangible product i.e. products without physical form belongs to this class of business organization.
Firms or organizations that render services provide professional offers like advice as in the law firm, skills as in carpentry, expertise as in financial engineers, and many other similar products.
2. Merchandising Business
Merchandising business as a business organization buys goods or products at a wholesale price and resells same products at a retail price. This class of business firms is also known as the ‘buy and sell’ business organization.
Here, their only means of maximizing profit is via selling of the merchandise they bought at a wholesale price — which is usually cheaper — and they resell it at prices higher than the cost price.
That being said, a merchandising business venture sells the merchandise to their prospective customers without changing the original form. Examples include: convenience stores, distributors, etc.
3. Manufacturing Business
Manufacturing business is another type of business organization that manufactures products from raw material into a finished good. Unlike the merchandising businesses, manufacturing business convert materials into a new product.
The intention of transforming any materials into a relatively new or different product is the main objective of manufacturing company, whereas; merchandising business sole intention is to maximize profits in the products bought without changing its initial form.
In the same vein, a manufacturing business organization combines raw materials, intensive labour, and overhead costs in their production process. They can only maximize profits after the manufactured goods is being sold to customers (merchandising business owners).
4. Hybrid Business
Hybrid businesses can be better described as companies that deal in more than one business at a time. This business creation cannot be classified as one type of business.
For example, a restaurant will buy ingredients and raw foodstuff to make a fine meal — that is manufacturing —, such restaurants will sell a chill of wine — merchandising — and at the same time fills their customer orders — service.
So with the above mentioned, you should be able to know the type of business venture you’ll be capitalizing on in the future.
Equally, you need to know the various forms of business organizations, because all these are the legal business structures that must be defined before a new business can be registered as a legal entity of the State.
Forms of Business Organization
The form of business entity your new business venture will adopts will have a significant role and multitude of factors to play and in deciding your company’s future.
So aligning your aim and objectives to your business organization form is vital and you need to understand the advantage and disadvantage of each of them.
However, there are basically five types of business legal structure that are famous and highly recognized anywhere in the world. Without further ado, they are as follows:
1. Sole Proprietorship
A sole proprietorship is a type of business entity that is owned by one individual. This business organization is very easy to begin with as well as relatively cheap to set up. Of all the forms of business ownership, sole proprietorship is the least in terms of startup capital.
The proprietor of this legal entity faces unlimited liability; that is, when the business is in a bad debt or owns a lot of credit, the creditors has the right to go after the business owner personal assets if the business is insolvent to pay.
Advantages of Sole Proprietorship
- All the profits maximize by the company are subject to the proprietor only;
- There is few or no regulation for the ownership;
- There’s total flexibility for the owner while running the company’s affairs;
- It has a few requirements (a business license only) for starting;
- Simplicity and flexibility in the proprietor retirement plans;
- It’s the easiest form of business organization to start or quash;
- It saves one from the intense expenses needed for forming a corporation or partnership deed; and
- A separate tax return file is not required; etc.
Disadvantages of Sole Proprietorship
- The proprietor is usually on his own;
- The owner is open to unlimited personal liability should the business incurred debts;
- There’s limited means of sourcing for financing aid;
- The proprietor cannot pitch investors for business fund;
- The business will be dissolved when the proprietor dies or sells his business rights to a new owner;
- Equity is usually limited to the proprietor’s personal resources;
- Ownership is often difficult to transfer;
- No differences between a personal earning and the business income; etc.
A partnership is a legal entity owned and managed by two or more individuals who contributed morally and financially into the business entity. The business partners will therefore divide profits maximize from the organization among themselves.
In a nutshell, in partnership deeds, all individuals that are privy to the business have unlimited liability. In this case, when the business organization becomes insolvent or enters into a debt, creditors lack the power to go after each partner’s personal assets.
Advantages of Partnership Deeds
- Shared resources among the partners provide more resources for the business;
- The partners have equal shares from the company’s total profits;
- It has a simple design as well as similarly flexibility of a proprietorship;
- Inexpensive to establish; whether formal or informal;
- There’s usually someone to assist you whenever you are away;
- Partners offer financial back up as unlike in sole proprietorship where the owner run it alone; etc.
Disadvantages of Partnership
- Each partner will be held responsible for any debts and losses incurred;
- Selling this business structure is difficult as it requires sourcing for a new partner;
- Selling this business structure is difficult as it requires sourcing for a new partner;
- Partnership deed come to an end when any of the partners decides to quit;
- Each partner has unlimited personal liability for any debt the business incurred;
- The business income as well as expenses will be reported on a different tax return; etc.
A corporation is another business entity that has a different legal personality from that of its owners. That is to say, business ownership in any stock corporation is often represented by the shares of stock.
That is, the owners (who are also the stockholders) enjoy a very limited liability as well as a limited involvement in steering the wheel of the company.
Also, there is usually the board of directors, here, who are elected or selected among the owners that run and controls all the corporation activities.
Advantages of Corporation
- The owners have limited liability to corporation debts or losses;
- The Corporation owns the profit and bear the risk too;
- It is pretty easy to be transferred to set of new owners;
- Owners personal cannot be traded for the business debts;
- It has a higher simplicity and flexibility than that of partnership;
- There are numerous classes of stock;
- Nothing like restrictions on the eligible owners;
- No corporate tax in Corporation (though not in all States);
- Unlimited number of shareholders;
- Very easy to sell stock;
- No need to disclose the corporate owners (in some state);
- Tax-free health or accident insurance to the employee;
- Perpetual existence of the business venture i.e. the business organization still continues with or without their founders; etc.
Disadvantages of Corporation
- Double taxation i.e. the profits made from the corporation and shareholders dividends will be taxed;
- The startup cost is very intensive;
- The cost of filling yearly paperwork like taxes, business incorporation, business license, etc., is too much;
4. Limited Liability Company
Limited liability companies (LLCs) are more or less hybrid forms of business structure that have an attribute of both a partnership and corporation. Although a limited liability companies are not incorporated; therefore, they cannot be termed as a corporation.
However, owners in LLC business entity enjoy limited liability just like the shareholders in a corporation business structure.
Equally, it’s up to the limited liability companies whether to be taxed as a corporation, as a partnership or as sole proprietorship business.
Advantages of Limited Liability Company
- The company owners enjoy limited liability from debts or losses incurred;
- The profits made from an LLC are often shared without double-taxation by the owners;
- It’s a hybrid of partnership deed and corporation business;
- Owners share of profits or debt may be record on their personal tax returns;
- Distribution of profit among the members is simple and flexible;
- It can be managed and controlled by the owner or an outsider;
Disadvantages of Limited Liability Company
- It must have a written operating agreement stating the members rights and duties just like in partnership agreement;
- A limited tax benefit against general partnership or sole proprietorship;
- No perpetual existence;
- Certain requirements must be met before the ownership interests can be sold; etc.
A cooperative organization is a legal entity owned by a group of people who come together under same umbrella for the purpose of operating a business that’ll yield out a mutual benefit. The people making up a corporative organization are called members.
Be that as it may, a Cooperatives business organization may be incorporated, and it may not be unincorporated. Some typical examples include: water and electricity cooperatives, credit unions, housing cooperatives, etc.
What are the 4 types of business organization?
- Service Business
- Merchandising Business
- Manufacturing Business
- Hybrid Business
What are the 5 forms of business organization?
- Sole Proprietorship
- Limited Liability Company (LLC)
While it’s important for every wannabe entrepreneur to understand the various types and forms of business organization, this article has hit the nail on the head; explaining all the five common forms of business organization ranging from sole proprietorship down to corporative organization.
To recap everything being said, a sole proprietorship was explained to be the easiest form of business structure to start. And if you’re planning to kick starts a business with more than two other people, a partnership deed will be your best bet. Like sole proprietorships, a partnership agreement is an ideal way to set up business real quick before adopting any other organization model.
In the same vein, a limited liability company seek to protect the personal liability or assets of it owners like house, car, savings, etc. In case there’s a bankruptcy or law suit, LLC is up for the loss and the owners. However, if you desire a complete separation between yourself and the business enterprise, going into a Corporation will interest you the most.