FOUR TYPES OF BUSINESS FIRMS

Broadly speaking, the term business in general refers to an entity that operates for commercial, industrial, or professional reasons. If judging from the organizational context, a business entity is basically an establishment intended to carry out commercial activities by producing goods or services and meet the people’ needs. As we know, most of the organizations have their own standard such as social structure, purpose goals, utilization of resources, rules and regulations, and so on. Although the fundamental purpose of a business organization revolves around facilitating efficient operations, optimizing resource utilizations, managing risks, and ultimately driving profitability and growth, however, determining the legal structure of the business is an important factor to consider since business owners may need to secure permits and licenses and follow registration requirements to begin their legal operations.

1. SOLE PROPRIETORSHIP

This is the traditional and popular form of business organization and has the least complex type of business due to the minimal government regulation. A sole proprietorship is a business owned and run by one person. It is usually very small with a few numbers of employees. Although they do not account for much sales revenue in the economy, however, they are the most common type of firm in the world. Due to the fact that the entity is incorporated between the owner and the business, still, the sole business owner is not free from liabilities associated with the business. After all, a local grocery store is the most common example of sole proprietorship where the scale of its business is relatively small.

2. PARTNERSHIPS

A partnership is identical to a sole proprietorship, except it has more than one owner. If two or more persons agree to do business together, a partnership is formed. Doing business as a partnership is a common-law right since there is no specific statute is needed to form a partnership. Each individual in a partnership business partners is liable for the firm’s debt owing to the fact that they share equally in the distributions of income and they have equal rights to manage the partnership. Regardless of whether the business is making profits or losses, it is usually advisable to have a written partnership agreement which will set forth the following details:

- Names and addresses of the partners.

- Relative rights to management and profits of each partner.

- The nature of the partnership business.

- Length or duration of the partnership.

- Requirements for admission and withdrawal of partners.

- Provisions concerning the dissolution of the partnership and any other provisions where the partners wish to govern their relationship as well as the entire operations of the business.

3. LIMITED LIABILITY COMPANIES (LLC)

A limited liability company (LLC) is a limited partnership without a general partner. It is neither a partnership nor a corporation, but a "hybrid" entity with some of the characteristics of each. In this type of business, the LLC may be solely owned or it may have several owners. The owners are called members like limited partners or shareholders, but they are not liable for the company's debts based upon their status as owners. Because the members have the right to manage the company's business and affairs, they may also elect to have the LLC to be run by one or more managers if they do not want to run it themselves.

4. CORPORATIONS

This is the most complex form of business structures because they are established under the laws of each state and also are subjected to all the corporate income tax. Besides, all the profits issued to shareholders as dividends are taxed as per the individual tax rates on their private annual tax returns. The distinguishing feature of a corporation is that it is a legally defined and artificially being separated from its owners. Because a corporation is a legal entity separate and distinct from its owners, it is solely responsible for its own obligations. That being said, the owners of a corporation or its employees, customers, etc. are not liable for any obligations the corporation enters into. Similarly, the corporation is not liable for any personal obligations of its owners, employees, customers, and so forth.

Perhaps, one of the unique features of a corporation is that there is no limitation on who can own its stock. That is, an owner of a corporation, do not need to have any special expertise or qualification. As the feature allows free trade in the shares of the corporation and provides one of the most important advantages of organizing a firm as a corporation rather than being a sole proprietorship, partnership, or LLC, the ability to raise substantial amounts of capital is greater because those who own the ownership shares can sell them to outside investors. Bottom line, corporation is also the most expensive to form and is subjected to double taxation where the business pays a tax on its income when earned, and its shareholders pay a tax on the income when it is distributed to them in the form of dividends, or the distributions upon the corporation's liquidation when bankrupted.