6 Types of Business Organizations Entrepreneurs Must ConsiderAbbakin
Failure to understand the different types of business organizations out there might make starting and growing a business seems like a daunting task.
Of course, choosing the best business structure will greatly affect the way you run your business and will ultimately affects your business success and growth.
This is because; some business structures work best for specific business types and at different locations.
You Need to Consider Everything From:
- capital investment,
- administrative control,
- risk of liability,
- taxation, and
- the ability to grow in the business.
The key here is to figure out which type of entity gives your business the most advantages when it comes to helping you to achieve your organizational, personal and financial goals.
There are six basic types of business organizations that we are likely to discuss in this section; each of which has its own advantages and disadvantages – so get ready to read more for detailed information.
These Types of Business Organizational Structures are Classified as Follows:
- The Sole Proprietorship,
- Partnerships Business,
- Nonprofit Organization,
- Limited Liability Company (LLC);
- Cooperatives Business and
- The Corporation
6 Types of Business Organizations Entrepreneurs Must Consider
#1. Sole Proprietorship Business
This is the simplest, cheapest and mostly used form of business organizations.
The sole proprietorships are so easy to start-up that you could be in one and not even know it.
- If you ever do contract works for a company and you are not on their payroll, then you are a sole-proprietor.
- Your kids selling watermelon down the street is a sole-proprietorship.
Sole proprietorship usually involves just one individual who owns and operates the business enterprise.
Sole proprietorship is an example of unlimited liability company.
If you intend to work alone, especially when you have learned the skill for the job and/or unfamiliar with the other forms of business organizations; this is the best way to start many businesses.
With sole proprietorship, one person is responsible for all the business profits or losses.
Yes! You will make all decisions; have complete control and freedom to enjoy the profits of the business.
However, selecting the sole proprietorship business structure means you’re personally liable for your company’s debts.
Thus, most individuals thinking about growth will want to consider a more formal business entity.
This is because with sole proprietorship, problems or lawsuits with creditors, employees and customers can put your personal assets including your home, car and bank credits at risk.
Raising money for a sole proprietorship can also be difficult.
Banks and other financing sources are often reluctant to grant business loans to sole proprietorship businesses.
In most cases, you’ll have to depend on your personal credit or savings, family loans or by taking on partners.
#2. Partnerships Business
A partnership business involves two or more individuals who agreed to share the responsibilities of a business.
There are two types of partnership businesses:
- General Partnership and
- Limited Liability Partnership (LLP).
This is where all the profits and losses are shared equally among partners.
That is, partners will have unlimited liability for the debts of the business.
A Limited Partnership is where only one partner has control of the business operations (the general partner).
While the other person or persons simply contribute money to and receive only part of the profits.
In this case, the limited partner receives profit sharing, but do not take an active role in the day-to-day operations of the business.
Depending on the funding and liability structure, partnerships carry a dual status:
- as a sole proprietorship (general partnerships) and/or
- as a limited liability partnership (LLP).
Therefore, personal liability is a major concern if you decide to use a general partnership to structure your business.
In the case of liquidation, all that the limited partners have to lose is the total amount invested in the business (share capital).
#3. Nonprofit Business Organizations
A nonprofit organization is pretty self-explanatory.
It is a form of business organizations that’s intended to promote educational, religious, sports or charitable purposes.
As businesses limited by guarantee: the objects of this type of company is not profit motivated.
The “non-profit” aspect comes into play in that any money earned by such a company must be kept by the organization to pay for its expense, programs, etc.
And such money earned however, cannot be distributed to its members, or trustees.
Keep in mind that there are several types of non-profit organizations available; many of which may receive “tax exempt” status.
So, depending on the parameters of your new business and your location, such a company must not have a share capital.
#4. Limited Liability Company (LLC)
A Limited Liability Company is a hybrid form of the partnership business organizations and structuring.
It allows owners, partners or shareholders to limit their personal assets while enjoying flexible tax benefits.
Though states laws may differ as to whether it is treated as a partnership or a corporation for states income tax purposes.
Under Limited Liability Company (LLC), members are protected from personal liability for the debts of the business;
as long as it cannot be established that they have acted in an illegal, unethical or irresponsible manner in carrying out the activities of the business.
If you need to explore other avenues for business funding — you may be better off establishing a limited liability company.
However, there is some level of paperwork as well as costs associated with the incorporation of LLC.
In the case of business failure or liquidation, members will only lose any unpaid Shares (i.e. assets contributed to the business as in the memorandum and article of association).
Caution: If you personally guarantee a debt in LLC, you’ve forfeited your “limited liability.”
#5. The Corporations
The joint-stock company (or corporation in the US) is the most complex form of business ownership. According to the Nigerian company law, corporation is a form of Public Limited Liability Company (PLC).
A corporation has some huge benefits as an entity that is separated out from its owners.
It provides limited liability for the investors, own its legal rights to engage in businesses — it can make contracts, sue, be sued, own and sell property, and pay taxes.
Because the life of the corporation is independent of its owners, the shareholders can sell their interests in the business without affecting its continuation.
That is, investors can transfer their rights of ownership in the form of stocks, either common or preferred.
With Public Company, it’s easier to attract investment capital, increase insurance premium, hire key employees and raise huge money from the banks.
The public organizational structure also, comes with a number of downsides. We will discuss more on corporation letter on the course series.
For example, using the structure follows more complex rules and regulations and more expensive than most other business organizations discussed above.
The corporation files its own tax return and pays taxes on its income.
If the corporation distributes some of its earnings in the form of dividends to shareholders, it does not deduct the dividend in computing its taxes, but the shareholder recipients must pay taxes on those dividends even though the corporation has paid taxes on its earnings.
You’ll probably need the assistance of an attorney to guide you through the public company incorporation processes.
#6. Cooperatives Business Organizations
Another interesting form of business organizations that most people don’t often understand is the cooperative business structure.
This is a form of business structure that is fully owned and operated for the benefit of the members of the organization – that use its services.
In other words, whatever is earned by the cooperative is then sheared out among the members themselves, and is not required to be paid out to any external stakeholders, etc.
Unlike other types of business organizations which have shareholders, cooperatives sell shares to cooperative “members,” who then have a say in the operations and direction of the cooperative itself.
The main difference in the process of starting a cooperative, as opposed to the other types of businesses listed above, is that the organization must create bylaws, have a membership application and have a board of directors with a charter member meeting.
In today’s social-economic environment, cooperative business organization are used by many as a means of helping member when in need of consumer loans or short-term borrowing that fund basic needs like health care, shelter, business, education, etc.
Wrapping up: 6 Types of Business Organizations to Consider
Understanding the different types of business organizations available can make the process simpler for new entrepreneurs who are having hard times selecting from a range of businesses.
Although, the types of business structures discussed in this session may reflect beyond the well known legal business structure as available in your own jurisdictions.
However, Abbakin provides free business information for all users. Our mission is to inspire, connect and empower our people to become world class leaders who effortlessly do business across time zones.
Whether you are doing the business alone or with another person, if you need more information about which business structure is right for you, we advised you speaking with a specialist in business law or a knowledgeable accountant for help.
If you have any question concerning how we can work together, kindly get in touch with us here.
Course Preview: Understanding Business Organizational Structure
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