The Optimal Type of Business Enterprise, Its Structure, and Control - Term Paper Example

A Report on Organizational forms Different forms of organization Sole Proprietorship Sole proprietorship is the oldest organizational form. It is controlled or owned by a single person and is a small scale work operated for the owner’s profit. It does not require any registration or any such complicated legal provision. It is often termed as sole ownership. It has the following characteristics such as – the capital is provided by the owner and any borrowing is done on additional requirement of funds, as there is no legal formalities it can be easily dissolved, it can be easily transferred to another person, the owner being the sole master has full freedom to take decision or actions, it can be easily formed as no legal formality is required, sole traders is the only legal entity of this business form, no legal restrictions for sole traders apart from setting up any particular kind of business, and the continuity of this form is based on life, good health or death of the owner. A sole proprietor is liable for all of the debts, and even possesses liability in account of any injuries caused due to business. The profit is retained entirely by the sole owner. The sole proprietor pays income tax on the total business income. It is the easiest form to set up a business but requires legal paper work for local licenses for a suitable state, and if the owner sets up the business in someone else’s name it than requires a business license. The main disadvantages of such a form is limited financial resources, limited managerial capability, uncertainty in continuity of the business, unlimited liability makes the personal properties of the owner at risk, and is not suitable for large scale business (Cross, 1928). General Partnership General partnership is a form of partnership where the business partner has unlimited liability. The partners have unlimited personal liabilities and are liable and can be sued for any partnership obligations. The profits are passed from divided amongst the partners according to agreement without any restriction. The partners have equal authority and rights in taking any managerial decision or action. Dissolution of partnership occurs when the relationship of the partners gets terminated due to various reasons such as death, bankruptcy or expulsion of a partner, which indicates impossibility to conduct such partnership business. The convenience is that it requires low volumes and cheap paper work for registration, but the burden of additional funds at cheaper price still remains even that the number of investors is more in this form. The main advantage is that it can increase the amount of funds raised, increases borrowing capacity, more knowledge and skills at a cost effective way (Cross, 1928). The disadvantage is of unlimited liability, profit sharing, shared decisions can result into disagreements, and this form has a limited life for continuity. Limited Partnership Limited partnership is a form where one or more partners jointly conduct a business. In this form the partners are held liable to the extent the amount invested by them in the business. The partners have access to the expenses or income but do not receive dividends. Like general partnerships in this form even the income is divided among the partners in a way to reduce taxes. It is normally taxed as in corporations. Any of the events such as death, winding up, bankruptcy, and disposal in terms of losing interest in partnership by partner, dissolution, and insolvency would not affect the continuity of limited partnership. The limited partners must give reasonable requirements to ensure that the partnership remain as limited until the deeds terminate. The control is shared amongst the partners depending on the liability of the partners. The profit is shared between the partners equally even if their contribution towards the investment was not equal. The limited partnership has some specific characteristics but in some cases it has similarity with that of the corporation. Limited partnership can be of two types’ general partners and limited partners. The profit and loss are shared equally in this kind of partnership and the tax is charged from the personal accounts of the partners rather than the company as a whole. The six characteristics for the limited partnership are as follows: A statute needs to be followed while creating a limited partnership or else there would be unlimited liability on the partners. The general partners individually have liability towards the business obligations whereas the limited partners would have the liability towards their individual capital contribution to the business. Whether the partner is limited or general in limited partnership would be entitled to profit sharing of the business. The limited partnership is dissolved with the withdrawal of the general partners, however the withdrawal of the limited partners do not dissolve limited partnership. General partners are often termed as fiduciaries whereas the limited partners in limited partnerships are not fiduciaries of the business firm. There is no payment of federal taxes by the limited partnerships but it is rather charged from the individual partners on the basis of the profit and loss sharing by the partners. The convenience of this form is that funds are raised easily with new limited partners whereas the burden is inability to operate if the partners die or are declared as incompetent (Cross, 1928). The main advantage is that the owners are not hold liable for the company’s debt. The disadvantage lies in filling, state requirements and formalities. It has the obligations of one partner not consulting the other partners for a business decision and hence requires a proper partnership agreement outlining what a partner can do and what cannot be done. C-corporation C-corporation is a legal structure that is chosen to limit the financial and legal liabilities of the owner. It is a separate legal entity compared to the owners. In this form the income tax is charged at the corporate level and is again charged when distributing to the owners. This form has an unlimited number of stockholders. Company’s owners have a limited liability. In case of corporate bankruptcy the shareholder’s will only lose their contribution. If the company’s assets are still left after satisfying creditors requirements than the shareholder’s stake is returned fully or partially. C-corporations income are subject to double taxation, where the corporate tax is paid and then the tax subtracted income is paid to shareholder’s as dividends who are obliged to personal tax. The continuity of this form is unlimited till it makes profits and covers all debt. The death of shareholder’s does not result into dissolution of such form (Cross, 1928). There is no direct control by the shareholders on the company but they exercise control through their elected board of directors. The profits can be used by investing in the business or by paying dividends to the shareholder’s according to their respective stakes. The convenience is easy rising of funds through issue of stocks; the company continues its operation even if the shareholders leave. The burden remains of double taxation, and complex registration. The main advantage of this form is the lower tax rates and it allows many owners. The disadvantage is that of double taxation and a great deal of formality through meetings. S-corporation It is a regular corporation that shareholder’s between 1 and 100 and passes it net income or losses to the shareholder’s in accordance with the IRC that is the internal revenue code. The shareholders have limited liability in this form where the shareholders only lose their shares in case of bankruptcy. It has a pass through taxation where the company does not pay the tax but the shareholder’s does. An S-corporation has unlimited continuity and any change in the shareholder’s number cannot change the operations of the company. The board of directors controls the company but the shareholder’s has an influence over the company. The profits are shared based on the stake of the shareholder’s towards the firm. It requires complex paper work and problematic shareholders’ meetings. The main advantages of this form are protected assets and pass through taxation method of taxation (Cross, 1928). The disadvantage is of stock ownership restrictions and less flexibility in allocating losses and income. Limited Liability Company This form of business structure comprise of members who are not hold liable for the company’s liabilities or debt. According to the federal government limited liability company is not a separate taxable entity so no tax is charged on the business itself but from the personal income tax of the members of LLC. The liability is limited and protects the LLC members from personal liability caused due to business decisions. The members may contribute different stakes so it is on the member’s to decide who deserves what percentage of profit. The continuity is limited as the company dissolves when a member leaves the LLC. The convenience is the easy raising of funds and that the members of LLC are not liable for any kind of liability or debt of the firm. Different member’s has different power of control depending on their stake in the company. The advantages that this form has are of less record keeping, limited liability and profit sharing (Cross, 1928). The disadvantages that the structure has are of limited continuity and self-employment tax where the entire income of LLC is subject to taxation. Recommendation The recommended form of business for this company is of C-corporation. The company has shown a profitable growth and has plans for expansion which requires more of funds which can be easily raised through this kind of business form by increasing the number of shareholder’s. This structure will help in limiting the financial liability of the owner. Even the profits can even be invested into the company apart from passing it as dividends to the shareholder’s. The problem of continuity of the firm is also resolved as if any of the members leave the company the company will not be dissolved. Investing the profits into the company is the most advantageous aspect of this form. Though tax is charged at the corporate level even the shareholder’s level but it reduces many of the risk that other business form has. The company needs to maximize its returns by lowering down the risk so this kind of business form is the best for the organization. References Cross, M.C. (1928). Types of Business Enterprise, Structure and Control. California: Prentice-Hall. Read More