1. What is a business organization?
a. Business organizations are entities involved in commercial activities conducting the owner’s regular occupation, profession, or trade.
b. There are three types of business organizations based on their structures:
b.1. For-profit organizations, also known as businesses or companies;
b.2. Not-for-profit non-governmental organizations; and
b.3. Government or government organizations
2. What are the factors that determine business structures?
Different attributes define a business structure. Some of them are:
a. Legal Identity. Different business structures have different legal identities. For example, some businesses have a legal identity separate from their owner and others have the same identity as their owners.
b. Owner-manager relationship. Sometimes the owners of the businesses manage the business and sometimes the managers are the employees of the business.
c. Owner liability. There are different legal liabilities for the owners of the business depending on the structure of the business. For example, in businesses with unlimited liabilities, the owner is liable for actions and debt taken by the business whereas in businesses with limited liabilities the owners’ responsibility is limited to their capital contributions.
d. Tax structure. This attribute defines the applicable taxation on the profits and losses of the business.
e. Access to financing. Some business structures such as partnerships and corporations can raise a higher amount of finance in comparison with sole proprietorship businesses.
3. What are the different types of capital structures?
Based on the above attributes we have the following types of capital structures:
a. Businesses
a.1. Sole Proprietorship
a.2. Partnership
a.2.1. General Partnership
a.2.2. Limited Partnership
a.3. Limited company
b. Not-for-Profit Businesses
c. Governments
3.1. Sole proprietorship (Sole Trader)
a. In a sole proprietorship business, the owner invests all the capital, manages the operations, and has full ownership of the risk and returns of the business.
b. Some examples of sole proprietorship businesses are freelance writers, yoga trainers, tutors, plumbers, etc.
3.1.1. Features of sole proprietorship business
a. The capital is provided by the proprietor, and he controls the operations of the business.
b. The owner fully participates in the risk and returns of the business.
c. The business does not have a separate legal identity apart from the owner.
d. There is no legal requirement to dissolve the business. The business dissolves when the business activity ceases, or the owner dies.
e. The business profits are taxed as the personal income of the owner.
f. This type of structure is simple and flexible.
g. The owner is personally liable for the debt and the activities of the business.
3.2. Partnerships
In partnership, the firms can generate a higher amount of capital, which is often brought by additional partners. These additional partners also share the risks and returns of the business. There are two types of partnerships: general partnership and limited partnership.
3.2.1. What are general partnerships?
General partnership is an extension of sole proprietorship, in the sense that additional partners bring in additional capital. They also share the risk and return along with the control of the business.
3.2.1.1. What are the main features of a general partnership?
a. There is more than one owner of the business.
b. These owners bring additional capital for business operations.
c. Along with the additional capital, the partners also bring in their share of expertise.
d. the partners share the control over the business operations.
e. The risks and the returns are shared amongst the partners in the agreed ratio.
f. In general partnerships, the liability over the debt and actions of the firm are unlimited and shared amongst the partners in the agreed ratio. If one partner is unable to pay his share of debt the remaining partners are liable to pay to pay for the same.
g. The business is also not separate legal identity apart from the identity of its owners.
h. The profits and losses are taxed as personal incomes of the owners.
3.2.2. What is a limited partnership?
a. A limited partnership is a partnership agreement like a general partnership with a minor difference. In a limited partnership, there are two types of partners. There is one general partner with unlimited liabilities. And the remaining partners are generally limited partners who have limited liability.
b. The potential losses of the limited partners are limited up to the size of their investment. Therefore, the personal assets of the limited partners are protected against the obligations of the business.
3.2.2.2. What are the main features of a limited partnership?
a. Business in such a partnership is often managed by the general partner. The limited partners often bring in their expertise, but their responsibility is limited as agreed in the partnership agreement.
b. The personal assets of the limited partners are considered separate from the business. Therefore, they’re not tied to the debt and other obligations of the business.
c. The partnership agreement under such a partnership is often complex. They are customized according to different profit and loss-sharing agreements.
d. Limited partnerships are also pass-through businesses for taxation purposes. That is, the businesses are not taxed separately. Their profits are transferred to the business owners and taxed as their personal incomes.
e. Sometimes, under limited liability partnerships, there are no general partners either. Here the risk of all the partners is limited up to their capital contributions. Such type of partnership firm structure is generally permitted only for professional service firms only.
3.3. Corporations (or limited liability companies)
a. Limited liability companies, or simply corporations are like limited liability partnerships but have more features than these partnerships.
b. The ownership of capital is divided into smaller units called shares. The shares have improved transferability features and the owners of these shares are called shareholders. The shareholders are the owners of the company, and they can transfer ownership through the sale of shares.
3.3.1. What are the features of corporations or limited liability companies?
a. Limited liability company have a separate legal identity which is different from the identity of its owners or shareholders.
b. The shareholders often point the board of directors who manages the affairs of the company through annual and general meetings.
c. Corporations are not pass-through entities for the taxation purposes. The profits in losses of the corporations are taxed and the remaining profits are passed on to the owners generally in terms of dividends.
d. Corporations generally have higher access to capital and expertise. Therefore, for the projects involving higher capital corporations are preferred form of business structure.
3.3.2. What are different types of corporations?
There are many three types of corporations: nonprofit corporations, public for-profit corporations, and private for-profit corporations.
3.3.2.1. Nonprofit corporations
a. Nonprofit corporations are often established for charitable purposes such as providing public health, religious purposes, Promoting education, etc.
b. The structure of nonprofit corporations are similar to the for-profit corporations. The owners are called shareholders who appoints the board of directors for management purposes.
c. These corporations do not distribute the profits as dividends. They plough back the profit and use the same for the purpose of the corporation.
d. These corporations also do not generally pay the taxes.
3.3.2.2. Public for-profit corporations.
a. These corporations are incorporated to earn profits for their owners or shareholders. These are profit driven companies.
b. The shares of these corporations are usually listed on the stock exchanges, and they’re often publicly traded.
c. For public corporations there’s no limit to the number of owners or transferability of shares. Therefore, these corporations have greater access to capital, and unlimited growth potential.
3.3.2.3. Private for-profit corporations
a. Unlike public corporations, under most jurisdictions, private corporations have limit to the number of shareholders. Therefore, the amount of capital that these companies can raise is also limited in comparison with the public corporations.
b. The shares of private companies are generally not traded on stock exchanges. They are generally traded through the buyer-seller agreement.
c. The profits of these companies are also transferred to the owners through dividend opens.
d. These companies are also managed by the board of directors appointed by the shareholders of the company.