×

Forms of Business Organizations

Top
Download PDF
FAQ

Bookmark added to your notes.
View Notes
×

What is the Need of a Business Organization?


Business Organization is an entity that is formed for the purpose of carrying on the commercial enterprise of selling and buying. These organizations are based on the systems of law that governs contract and this exchange, property rights, and incorporation.

Business Organization system is concerned with the management and planning of different activities. This is an accumulation and coordinating the resources such as men, material, money, machine to produce the goods and services, the business organization works coordinate and control all these factors of production.


Meaning of Business Organisation

Business organization is defined as an entity which is structured for the purpose of carrying on the commercial system of enterprise. The organization is governed under principles and laws governing contract and exchange of goods and services.

Business enterprises generally take one of these three forms:  

  • Proprietorship

  • Partnership 

  • LLP

Proprietorship


In the proprietorship form one person is responsible for the entire operation as his own personal property is entrusted in it. This is usually managed on a day-to-day basis. Majority of the businesses we see around us are of this category.


Partnership


The second form is Partnership, this needs 2-50 members to pursue the business. Law and accounting firms, brokerage houses and other advertising agencies are of this form. The business id formed by the partners themselves, their share of profit varies with individual investment invested in the partnership.


Limited Liability Partnership


The third form, which is the LLP form is a very popular form of business for its inherited advantages from the partnership and company form of business. The company is legally separated from the individuals who work here in this organization. They might be the shareholders or the employees who come in legal contract and thus can be sued and be sued by the company. The big industries and commercial organizations are limited-liability companies. 


Choice of Forms of Business Organisation

The four-prior types of business organization are:

  1. Sole Proprietorship

  2. Partnership

  3. Corporation

  4. Limited Liability Company


1. Sole Proprietorship

The simple and common type of business found is this form of business ownership. Sole Proprietorship is a business which is owned and managed by a single individual for his own benefit and gain. The existence of this business depends upon the single owner, the business’s success and profit depends upon the owner. The business comes to an end after the incapacity or death of the owner. 

2. Partnership 

There are two types of partnership:

General Partnership and Limited Partnership. Normally, both the owners invest their money, property and workforce in this business. They both are liable for the business debts. Also, partnerships do not require a formal agreement to start their business. The business agreement can be verbal or even be implied between the two partners. While Limited Liability Partnership or LLP requires a formal agreement between the partners. They also are liable to certify with the state. 

3. Corporation

These are the separate entities from the individuals or the members working here and are considered as a legal person. The profits generated by a corporation are taxed under “personal income” of the company. The income distributed to the shareholders are the dividends or the profits that are taxed as the personal income of the owners. With certain advantages the corporate structure does face disadvantages as well. The corporate structure faces double taxation which is one of the complexities of tax structure in this form of business. 

4. Limited Liability Company (LLC)

LLC provides the owners with limited liability also providing some of the income advantages of a partnership. Precisely to point, the advantages of partnerships and corporations are mixed in an LLC. LLC is a very popular form for its advantages. 

Thus, all these were the forms of business organizations, from these an individual chooses one to suit his venture and interest.

FAQ (Frequently Asked Questions)

1. Name Some Sole Proprietary Business that we see Around us?

Ans. Sole Proprietary are those businesses which are owned and managed by a single or one individual. The expenses of the business along with the profit is all incurred and gained respectively by the individual business owners. In India, there are local sole proprietors like the local shopkeepers who sell stationery, or the medical shops, beauty salons etc.

2. How do the Partners Share the Profit?

Ans. The profit-sharing ratio in a partnership business is either written down in the agreement or implied or even verbally communicated among the partners. The business profits are at times shared equally or even shared according to the capital investment ratio of the partners.

3. What is a General Partnership?

Ans. A general partnership is an unincorporated form of business with two or more owners that shares the business responsibilities. The general partner has unlimited personal liability in case of any debts and obligations of the business. Also, each partner represents their share of business profits or losses on their individual tax return.

4.Why do Corporations Face Double Taxation?

Ans. Double taxation occurs as corporates are the separate and legal entities distinct from their shareholders, so corporates pay taxes on annual earnings like the individuals also when the shareholders receive dividend, those dividend is attached with income-tax liability for the shareholders even though the cash which was paid as dividend was taxed earlier in the corporate taxation structure.