Business Organizations
Business organizations are legal entities with rights, responsibilities, specific legal obligations, tax issues, and other liabilities. Their activities are governed by business, commercial, and contract law. The structure of a business organization requires careful advance planning around the resources available and the degree of financial exposure the organization is willing to risk. Each business organization structure has specific pros and cons when it comes to the way the organization transacts business with external parties and employees.Types of Business Organization Structures
There are four primary types of business organization structures:
- Sole proprietorships
- Partnerships
- Corporations
- Limited liability companies
In a sole proprietorship, the business owner has no employees and is responsible for all aspects of the business. Benefits include the fact that it costs less to launch this type of business. Disadvantages include the fact that the proprietor’s assets can be seized in case of losing a lawsuit or filing for bankruptcy.
In a partnership, the business owners, or partners, contribute capital and other resources. The partners themselves are responsible for income taxes, but the partnership is not liable for taxes. Partners share in profits, loss, and liabilities according to whether they are limited partners or general partners. General partners are responsible for the partnership’s debts.
In a corporation, the officers and shareholders are not personally held responsible for the entity’s liabilities. Tax liability differs between C Corporations and S Corporations. In a C Corporation, shareholders and the corporation itself are subject to taxes; in an S Corporation, income tax or loss burden rests on the individual shareholders.
Forming a Corporation
There are several benefits of forming a corporation:
- It is easier for a corporation to raise capital
- The entity continues to exist after an owner dies or sells his/her shares
- The corporation can establish retirement plans.
In a limited liability company, taxes are handled in a manner similar to a partnership entity.
Business Organization Contracts
A business organization does business based on a set of contractual relationships among creditors, employees, customers and suppliers. Contracts establish in writing what each business agrees to do or purchase from another entity or individual; they also specify the amount a party in breach of the agreement must pay to the other party.
Business organization and contract laws are very complex. Owners should always consult an attorneys for advice in business planning and for representation in case of lawsuits.
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