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THE ENTERPRISE, TYPES AND ORGANIZATION

FORMS OF BUSINESS ORGANIZATION

The three most common forms of business organization are the sole
proprietorship, the partnership, and the corporation. Business laws and
the usage of company titles in some countries may vary from the definition
and description of each form of business organization given below.

1. Sole Proprietorship

Sole proprietorship---single proprietorship or individual proprietorship---


is the simplest form of business organization. As the name suggests, the
business is owned by one person.

1.1. Advantages

Not many formalities are needed to establish a sole proprietorship. Start-up


costs are low and working capital requirements are minimal. The owner
manages and controls the business, free from outside interference, except for
government regulations. All profits go to the owner. The owner is free to
choose to reinvest the profits in the business or to dispose of them. Possible
tax advantage.

1.2.Disadvantages

The liability of sole proprietor is unlimited. The owner is personally liable for all
the debts of the business to the full extent of the owner's property. Illness of
the owner may interrupt the business and the owner's demise may terminate
it. It can be difficult to raise capital.
2. Partnership

In a partnership form of business, there are two or more owners known as


partners. The partnership law differs from country to country and the
applicable terms to the partnership vary. A partnership business can be a
limited partnership or an unlimited partnership.

In a limited partnership, at least one partner, but not all partners, assumes
limited liability---liability only to the extent of the capital the partner has
contributed to the partnership. The company name may end with the words
"Co. Ltd.", "Company Limited", "Ltd.", "Limited", or their equivalent in other
languages.

In Europe and some other areas, the words "Limited Company", "Limited
Partnership", or their equivalent in other languages may signify a corporation.

In an unlimited partnership, all partners assume unlimited liability---liability


for the partnership debts to the full extent of the their personal property. The
company name may end with the word "Co." or "Company", or its equivalent in
other languages.

2.1. Advantages

Partnership is easy to form. Start-up costs are low. The partners provide
additional sources of venture capital. The management base is broader. It is
free from outside interference, except for government regulations. Possible tax
advantage.

2.2. Disadvantages

Partners assume unlimited liability in an unlimited partnership. It lacks


continuity death of a partner dissolves the partnership. The authority is
divided. The profits are divided among partners in a proportion agreed upon in
the partnership contract. It can be difficult to raise additional capital. Often it is
difficult to find suitable partners.
3. Corporation

A corporation is a legal entity---an artificial being, invisible, intangible, and


existing only in the contemplation of law. Corporate laws vary from country to
country. Legal advice is necessary to form a corporation. The corporate name
may end with the word "Corp.", "Corporation", "Inc.", "Incorporated", or its
equivalent in other languages.

A corporation is limited in duration by law. It can have a legal life of generally


20 or more years. The articles of incorporation---certificate of incorporation or
corporate charter---specify the details of the organization. A corporation
requires a minimum number of persons, generally 3 or more. The ownership of
the corporation is represented by its capital stock, which is divided into
identical units or groups of identical units called shares or stocks. These shares
are represented by the written instruments known as stock certificates. Stock
certificates are usually classified into common stock and preferred stock, with
different preferences, restrictions and limitations. The owners of the shares are
called stockholders.

A corporation can be public or private. In a public corporation, anyone can


become a shareholder and its stocks are usually traded on a stock exchange.
In a private corporation, the number of shareholders is restricted and its
stocks are not traded on a stock exchange.

3.1. Advantages

The liability of stockholder is limited to the stocks owned. The ownership is


transferable without affecting the corporate existence. It enjoys continuous
succession. It is easier to raise large sums of capital through the sale of stocks
to the public. Management is specialized, concentrated in the hands of a Board
of Directors. Possible tax advantages.

3.2 Disadvantages

The corporation is the most expensive form of business organization. It is


closely regulated. It requires extensive record keeping. There is double
taxation---the corporation is a legal entity required by law to pay income tax,
the stockholder is also required to pay income tax on dividends, that is, the
earnings from stocks received from the corporation.