Types Of Organization Structures - Essay Example

Types Of Organization Structures Aim of the Report This paper purposes to discuss the various forms of organizational structures that businesses fit it under the legal framework. These four main types of organizations are the sole trader or sole proprietorship business, the partnership business, and the limited company business, which divides further into two, a private limited company and a public limited company. Each of these business structures has its own legal requirements before formation, and a number of differentiated features, which determine the level of profitability, the speed of growth and development, as well as the volume of sales and turnover depending on its structure. A sole proprietorship is the smallest form of business structure, followed by a partnership, while the company is the largest form of business structure Sole Proprietorship A sole trader or a sole proprietorship type of business is a business structure established and owned by an individual, or a single legal person. A sole trader has to provide all the capital, as well as the labor necessary for the business to grow and operate profitably, especially considering that the capital available to him or she is not always adequate. Legally, a sole trader has to bear all the liability of his or her business, and as such, personal property can be attached to pay the debts brought about by his or her business. However, a sole proprietorship is the simplest business structure to set up, as it only requires the registration by the owner. The business owner is in direct control of all the elements and operations of the business, as well as bearing the accountability of all the finances of the firm, inclusive of business profits, business losses, business debts, business loans and business assets. During the beginning of the business, after getting the certificate of registration, family members can assist in running the business. Sole proprietorships are the common forms of business structures in existence in the market today, majorly because of the numerous advantages that accrue to a sole trader. For one, it is cheap, simple and quite easy to establish a sole proprietorship business very fast because it does not have numerous legal demands because they carry little or minimal ongoing legal formalities. In addition, a sole trader does not have to pay his or her unemployment taxes. However, the sole proprietorship has its own set of legal constraints making it not the preferred business form. One of the worst demerits of a sole proprietorship is the fact that owners are subject to unlimited personal liability for the debts, liabilities, and losses suffered by the business. As such, personal property can be attached to offset these liabilities. A sole trader cannot secure financing from banks on the formation of the business, or sell out some interest in the business in order to raise more capital, thereby limiting his or her capital threshold. Finally, a sole proprietorship lacks its own life, and in most cases, dies with the demise of its owner. A Partnership Business Structure A partnership by definition is a type of business organization in which two or more individuals’ (2 to 20) come together and pool resources e.g. Money, skills and other resources, and do share profit and loss in sync with the terms of the partnership agreement. In the absence of such agreement, the partnership is assumed to exist where the participants in an enterprise agree to share the associated risks. Simple Partnerships A simple partnership refers to a contractual relationship existing between two or more persons with the key aim of achieving a joint goal through putting their effort and means together. However, a simple partnership does not have any legal recognition, thus cannot be categorized as a legal entity. It differs from commercial companies because it cannot, and may not use or sign any legal documents under its own legal names. Partners in a simple partnership are either jointly or severally liable for the business liabilities, as well as all obligations that might accrue to the business during its operations. Establishment of a simple partnership requires certain constellations and situations such as formation to undertake an individual business activity, or to the enterprise for a limited duration, or formed during the founding phase of another legal form. Limited Partnerships Limited Partnerships, also known as a partnership with limited liability (LLP), are more complex than general partnerships. LLPs allow partners to have limited liability as well as limited input with decisions affecting the management. These limits rely on the level of investment injected into the business by each partner. LLPS are attractive to investors of short-term projects. In an LLP, one partner is not responsible or liable for another partner’s misconduct or negligence. This difference is important from the traditional unlimited partnership under the Partnership Act 1890. In an LLP, some partners have a form of limited liability similar to that of the shareholders. Limited Companies Limited companies exist in two legal forms, a private limited company, and a public limited company. A public limited company is a business organization operating as a separate legal entity from its owners, and with a limited liability of debts, loans, and other company credits. A private limited company equally operates as a legal entity and has limited liability for debts and loans from its owners Private Limited Company Private limited companies are considered private because they do not have the ability to offer an interest of the company to prospective investors for them to invest into the company by way of raising capital, which is unlike the public companies. Therefore, owners and directors of the private company will have the sole responsibility of raising the necessary capital required for the business. As such, the private company cannot sell its shares to the public to raise shares. Furthermore, the shares of a private company are not easily transferable or sold from one shareholder to another. A private company begins its operations immediately after getting the certificate of registration from the registrar of companies, which is unlike the public company. Company directors for this corporation should be a minimum of two and a maximum of 20. In addition, the private companies do not have an obligation to declare their profits to the public or to disclose their financial statements. Public Limited Company A public limited company is considered public because it can flaunt its shares or interests to the public through the stocks exchange so that the public can purchase a stake in it and invest in the company. This is the best way of raising capital within a public company whereby the company sales shares to the public to raise equity capital necessary to get the business moving. As such, it is easy to sell and transfer shares from one shareholder to another, in a public limited company. A public company has to wait until it is issued with a certificate of incorporation before it commences its business activities. This certificate comes after receiving the certificate of registration. The minimum number of directors in a public limited company is seven and a maximum of fifty. Because these companies solicit for capital, from the public it is necessary for them to declare their profits, as well as make public their financial statements and corporate governance structures in order to let the investors know what is going on within the company. Stakeholder Information A stakeholder refers to persons, groups of people, or separate organizations that have a direct or indirect interest in the activities of the business, especially in its success and profitability. In most cases, the stakeholder portfolio for either a large or small business may range from the creditors of the business, the employees to the business, the shareholders of the business, to the owners of the business, as well as labor unions and the community that surrounds the business environment. The number of stakeholders in every business depends on the structure of the business. As such, the various stakeholders for each business structure discussed above is as follows: Sole proprietorship – the sole trader is the main stakeholder as the owner of the business. Other stakeholders include business creditors who bring supplies to the business, customers who purchase products and services from the business, family members and employees who provide labor to the business, as well as the business community served by the business. Partnership – the partners who form the partnership are the main stakeholders in the business because they are the business owners. Other major players in the stakeholders’ circle include the creditors, debtors of the business, the business community, the government or licensing body, as well as the customers Private limited company – the business owners in the company are the key stakeholders as they have stakes in the success or failure of the company. Other players include the directors of the company, the employees of the company, other shareholders of the company, the creditors, and debtors of the company, the financiers of the company, the customers of the company, the business environment of the company, as well as the government. Public limited company – the shareholders are the key stakeholders in a public limited company as they hold the bulk of interest in the company. They are the company owners. Other stakeholders of the company include company directors, executive management and employees of the company, workers union, creditors, financiers, the business community, consumers, licensing bodies, registrar of companies, and the market. Conclusion In setting up a business, it is therefore imperative for every proprietor to evaluate the different forms of business structures available and decide on which one is best for him or her to set up the business. Therefore, the business structure adopted must be in total consideration of all the legal provisions, as well as guaranteeing the proprietors’ maximum returns and profitability from their investments Reference List Brough, G. (2005) Private Limited Companies: Formation and Management. Florida: Sweet & Maxwell. Clarkson, K. & Cross, F. (2010) Business Law: Text and Cases: Legal, Ethical, Global, and Corporate Environment. Stamford, Connecticut: Cengage Learning. Gage, D. 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