3 Forms of Business Organization-Explanation and Example

 A business organization is an entity with primary 3 forms of business organization that is based on the commercial enterprise by providing all goods or services according to customers’ needs.

This term specifies how businesses are organized or structured and how these structures help them pursue their goals. In general, business is organized for two purposes: generating a reasonable profit or improving society.

 If you are interested in business and worried about business organization, this article will surely help you sort out all the questions roaming in your mind.

What are the 3 primary forms of Business organization?

Different categories are required to organize any business, but its primary and essential forms are three; sole proprietorship, partnership, and the last one are Corporation.

Moreover, these are the fundamental pillars as you compare the costs & benefits of a sole proprietorship, partnership, and Corporation.

So, let’s start and discuss every bit of detail about these 3 forms of business organization.

1. The sole proprietorship

The sole proprietorship is the easiest or the least complex form of business organization. In this form, one owns an individual business, makes and is responsible for all business decisions; he receives all the profit that the company earns and bears financial losses.

 Firstly, the simplicity of any individual proprietorship is apparent, and knowing the legal restrictions, any person can decide to select a business enterprise except those areas where you must require a business license.

Aside from such limits, a person who has accumulated or borrowed funds to set up a business does not need legal work to set up a sole proprietorship. In business, the proprietor is supremely responsible for all decisions related to business.

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 Here, the owner decides how many employees he should hire, when they must be penalized or rewarded, what products he should produce, and how these products should be marketed. In simple words, the owner is free to make any foolish or wise decision.

Example

You make up your mind to set up a business without any partnership. You are responsible for all benefits and losses depending upon your decisions. Here, decision-making authority is clear-cut as it resides with the owner without any consultation.

2. Partnership

A partnership is like an individual proprietorship consisting of two or more two individuals or owners. Furthermore, it is a business enterprise owned by two or more people and are said to be partners.

The partners who make all decisions equally share all business profits, and they have to bear all financial losses if they face them. Like any individual proprietorship, the partnership is relatively easy to establish.

Most of the partnerships are based on an agreement that spells out the ownership of each partner’s shares and duties. Sometimes, one partner makes business decisions, while the second one may provide only financial capital.

This agreement is based on the division of responsibility for running this business, as the equal contribution of different amounts of financial capital to the organization.

Example

A partnership can be understood by the example of three friends who own a petrol pump. In this partnership, one may provide financial help, the second uses his business skills, and the third helps in management and other things, but they must share profits/ benefits.

3. Corporation

The corporation or the corporate form of business is a simple setup to reduce the disadvantages of partnership and proprietorship. It is an essential kind of business organization that many shareholders own.

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Corporation has the legal status of a fictional individual and is authorized by law to act as one person. Here, all shareholders have to elect the board of directors who appoints management of the corporation.

The president and administration usually head him are charged with the corporation’s operation. In a corporate charter, you need a whole set up of corporations that are not required in proprietorship and partnership.

The corporation is typically owned by shareholders who have purchased an equal share of stock incorporation.

And the management of the corporation is required by law to issue all periodic reports to the shareholders mentioning complete detail of the financial and business activities of the corporation during the reporting period.

What are 3 types of corporations?

There are three types of corporations that help to understand the detail of the business organization.

  • C-corporation
  • S-corporation
  • Limited Liability Company
1. C-corporation

C-corporation is the first form of the corporation where you are taxed separately from owners. It provides the owner a limited liability that helps to encourage more risking and other potential investments.

In addition, shareholders can sell their shares, or you can say it is the transfer of ownership. There are plenty of advantages of C-corporation, including tax and company paid fringe benefits, limited liability, and raising capital through the sale, which is an easy process.

2. S-corporation

An S-corporation is also named as subchapter S-corporation that offers limited liability to its owners. It does not pay any income taxes, and its earnings and profits are treated as a distribution. Here, the capital is easily raised through the sale of stock.

Moreover, the shareholders must report their income based on their individual income tax returns. Many benefits you will find in S-corporation like limited liability, avoiding double taxation, and profits taxed only once. Here, capital is easily raised through the sale of stock.

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3. Limited liability company

A Limited liability company is a blended business structure that provides you a limited legal liability of a corporation & the operational flexibility of Sole proprietorship and partnership. But its formation is quite complex and formal than any general partnership.

To form a Limited liability company, you need a business owner to file the legal paperwork. For further progress, you must consult an attorney to assist you in the whole process.

It is a standard business structure that is created for small businesses with an unlimited number of owners. LLC has a separate legal entity and has insurance in any case of a suit.

Example

If an individual owns 1,00,000 shares of PAL stock and contains 630 PAL shares, this person would own 0.016% of PAL. Owners of shares have the right to vote for the board of directors and vote on the special referenda at the corporation annual meeting.

Final words

If you are interested in business and want to pursue it, you must know its 3 forms of business organization. This article’s main objective is to discuss 3 significant forms of business organization with you guys: proprietorship, partnership, and Corporation.

To check the progress detail of any business, you must have to compare the cost and profit of sole proprietorship, partnership, and Corporation. If you are the only person to start a business, then you fall into sole proprietorship.

A partnership is a form that needs two or more than two partners, while a corporation runs with a large number of shareholders. All 3 forms of business organization are well-explained, as you can read them.

This article will help you to end all your queries regarding the business organization. I hope you guys enjoyed it! Thank you.

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