It is important for any person who intends to get involved in business to take into consideration the various forms of business that exist and analyze which one is the best. The various business organization styles have advantages and disadvantages that differ greatly, and it is of great importance for the business owner to analyze the type in terms of the tax, and personal or legal issues that arise when one chooses the particular style of business organization (Murray, 2010). In this paper, various styles of organization are analyzed in terms of their advantages, disadvantages, and the implications that one may face when he/she chooses a given style.
Sole proprietorship
This style of business organization is used by many people. In fact, most of the corporations and partnership businesses that exist today were sole proprietorship at initial stages (Garrison, 2011). This is perceived as the most risky organization style because its success is dependent upon an individual that is responsible for the daily running of the business.
Advantages
This style has the advantage of being formed and dissolved easily. This is highly characterized by the low costs incurred during the setting up of the business. It also involves low operational costs and the owner has the unique advantage of full ownership of the profits. The business may use the profit for other activities or he or she may reinvest in the business
Disadvantages
This business involves 100% risk on both personal and business assets. The owner in a sole proprietorship is responsible for the debts that may be incurred during the running of the business (Garrison, 2011). Funding for such business is also a challenge because the source is limited to the savings made by the owners or consumer loans from banks or other microfinance institutions. In addition, some of the employee benefits that may be enjoyed by employee in other styles of organization may not be deducted directly from the business’ income (Perez, 2012).
Tax implication
Taxation in this business organization style is achieved by the taxation of the owner’s individual’s income.
Legal implication
The business owner is legally responsible to run the business with complete control and he o she therefore does not consult anyone before making any decision that affects the business.
Accounting implication
Since this is definitely a private business, the use of SOX and FASB regulations are limited for the owner of the business responds to no other person.
Partnership
This is a business organization style in which more than one individual come together for one business goal. The individuals in partnership contribute towards the running of the business and a given direction is taken after an agreement is reached (Perez, 2012).
Advantages
Such a business organization style promotes the chances of value enhancement in the business as a result of combined strengths from different individuals. They are relatively easy to form as compared to corporations. The combined effort in running the business increases the potential for accessing capital in large amounts (Garrison, 2011).
Disadvantages
There is a relatively higher personal risk since every individual in the partnership has an obligation to ensure the success of the business. The business also has a limited life since the death or withdrawal of one partner may result into the end of the partnership. In addition there is a higher likelihood of the occurrence of conlicts especially when partners cannot agree on direction that should be taken in running the business (Perez, 2012).
Tax implication
The individuals in the partnership pay tax at the individual tax rate after declaring their share of the profit from the net income.
Legal implication
There has to be a drafted agreement before the partnerships is initiated. This comes in handy during the resolution of conflicts arising as a result of running the business.
Accounting implication
This business style may employ the use of external auditing firms and regulations if there arises a doubt among a section of the individuals in the partnership.
Corporation
This refers to an entity that does business legally and is always distinct, during the operation, from the members or individuals in the organization. A corporation has shareholders who elect the board to run the business. There are two types of corporations namely; S-corporation which has a minimum of 1 shareholder and a maximum of 100 shareholders and C-corporation which has a maximum of more than 100 shareholders (Garrison, 2011).
Advantages
This business organization style has unlimited life in the business for it cannot be dissolved even when there is a change in ownership. There is also an additional advantage created by the selling of stock which is a source of great flexibility while raising capital and also during the transfer of ownership (Garrison, 2011).
Disadvantages
It is costly, in both time and funds, to start and run a corporation. Corporations also have the disadvantage of being closely monitored and regulated by the various government agencies and hence it may be costly to comply with the restrictions.
Tax implications
Corporations are subject to income tax which is determined by the government. The dividend given to the shareholders are also declared a individual income and are therefore subject to further taxation (Perez, 2012).
Accounting Implication
Corporations are subject to extensive scrutiny and auditing of its transactions by government agencies. It therefore means that the use of bodies such as FASB is something that cannot be avoided.
Choice of Business Organization Style
In my business I will embrace partnership as a style of organization. I will seek other partners who have similar business objectives as mine and enter into a partnership with tem to ensure that together we become successful. In this case we, the individuals in the partnership, will have a common source of capital and hence relatively similar risk factors. These can easily be overcome by the combined efforts of the individuals (Murray, 2010).
A partnership quickens the realization of income from projects that are funded by the government and is better than any other style of business organization especially taking into consideration the factors as discussed above.
References
Garrison, S. (2011). Types of Business Organization. Retrieved from http://www.studyfinance.com
Hall, Steve M. "Level Five Leadership in Business." N.p., n.d. Web. <http://www.ishowthemoney.com/>.
Murray, J. (2010, May 7). Selecting a Business Organization Type - a Checklist. Retrieved from http://www.about.com
Perez, W. (2012, February). Types Business Organization. Retrieved from http://www.businessfinance.com/books/startabusiness/
