Forms of Business Organizations

Topics: Corporation, Types of companies, Types of business entity Pages: 11 (2809 words) Published: October 23, 2011
• Sole proprietorship: A sole proprietorship is a business owned by one person. The owner may operate on his or her own or may employ others. The owner of the business has total and unlimited personal liability of the debts incurred by the business. • Partnership: A partnership is a form of business in which two or more people operate for the common goal of making profit. Each partner has total and unlimited personal liability of the debts incurred by the partnership. There are three typical classifications of partnerships: general partnerships, limited partnerships, and limited liability partnerships. • Corporation: A business corporation is a for-profit, limited liability entity that has a separate legal personality from its members. A corporation is owned by multiple shareholders and is overseen by a board of directors, which hires the business's managerial staff. • Cooperative: Often referred to as a "co-op business" or "co-op", a cooperative is a for-profit, limited liability entity that differs from a corporation in that it has members, as opposed to shareholders, who share decision-making authority. Cooperatives are typically classified as either consumer cooperatives or worker cooperatives. Cooperatives are fundamental to the ideology of economic democracy.

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The three main categories of business organization are the sole proprietorship, the partnership and the limited liability forms. Among the latter two of these, several different forms exist. Other possibilities include the unincorporated association and the nonprofit corporation. 1. Sole Proprietorships

o A sole proprietorship is a one-man business. The owner is liable for all of the company's debts. Furthermore, the company's income is considered to be the owner's personal income and must be reported on the owner's individual income tax return. The advantage of this form of business organization is simplicity--no partnership agreements need to be signed, there are no corporate registration formalities to perform, and there is no need for corporate formalities, such as shareholder's meetings. General Partnerships

o In a general partnership, the business is owned by two or more general partners. Each of the partners is liable for the debts of the business. Although the partnership must file a separate tax return, each general partner is required to report his pro rata share of the partnership's income on his individual income tax return. A partnership agreement is a practical necessity for this form of business organization. Limited Partnerships

o In a limited partnership, there is at least one general partner (with unlimited liability) and at least one limited partner. The limited partner's liability for the debts of the partnership is limited to the amount that he contributed to the partnership. As with a general partnership, a limited partnership should file a separate tax return. Limited partners are entitled to a certain return on their investment but generally have no management authority and need to report only the partnership's income on their individual income tax returns. Corporations

o A corporation is a limited liability entity that is treated as a separate legal person for tax purposes. It must file its own tax return and is taxed separately from the shareholders. The shareholders of a C corporation are liable for the corporation's debts only to the extent of their contribution to the corporation. Shareholders need not report the corporation's income on their individual income tax returns--only income they receive from the corporation. In the United States, a corporation must be registered with the state of its incorporation. Corporations may sell shares to the public if extensive public offering requirements are met. An ordinary corporation may become an S corporation...
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