The four key forms of business organization include sole proprietorship, partnership, corporation, and limited liability company–each having several distinct characteristics predetermining legal, financial, and other issues. Thus, it is highly important to choose an organizational structure thoroughly as each of them has certain advantages and disadvantages that have to be considered in advance to avoid later complications (Burke, 2017).
Advantages and Disadvantages of the Four Forms of Business Organization
Sole Proprietorship
A Sole Proprietorship is a kind of business that has only one owner who employs workers if necessary. It is the most primitive and widespread form of organization characterized by: a single owner, small size and easy management, unlimited liability, and simplicity in opening and dissolving a business (Burke, 2017).
The advantages are (Burke, 2017):
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It is the cheapest and the simplest type of business that can be easily started and dissolved.
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The owner of the business is free to follow his/her strategy.
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The owner receives the whole profit (if he/she does not employ anyone).
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There are not so many regulations that this business has to follow.
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The owner does not have to pay corporate income taxes.
The disadvantages are (Burke, 2017):
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The owner cannot share responsibility with anyone else.
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The owner must invest his/her savings into the business. Since there are lots of sole proprietors, it is rather hard to raise capital.
Partnership
A Partnership is a form of organization owned by two or more people who are referred to as partners. It has three major types: general partnership (divided liability and responsibilities of partners), limited partnership (with one general partner and one or more partners having limited liability), and limited liability partnership (with no general partners) (Daft, 2015).
The advantages are (Daft, 2015):
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Although a significant amount of time is required to develop a partnership agreement, it is still rather easy to do.
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Since there are several investors, it is easier to make a profit.
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Partners do not have to pay corporate income taxes.
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It is not difficult to find employees as they are attracted by a chance to become partners.
The disadvantages are (Daft, 2015):
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Partners have to reach a compromise in obligations.
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Conflicts and disputes are inevitable and may threaten success.
Corporation
A corporation is an organization with limited liability that has numerous shareholders and is controlled by a board of directors (distinct from its owners). There are several types of corporations: S-Corp (up to 100 investors), C-Corp (any number of investors), and non-profit corporations (Daft, 2015).
The advantages are (Daft, 2015):
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Selling stocks brings additional profit to the organization.
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The ownership can be easily transferred to another person by selling one’s share.
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The value of one’s stock determines this person’s liability.
The disadvantages are (Daft, 2015):
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This form of organization is closely watched by various governmental agencies and has to follow a lot of regulations.
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Shareholders have to pay both personal income taxes and corporate ones.
Limited Liability Company
A limited Liability Company (LLC) is a private organization with owners who bear legal responsibility for its losses only to the extent of their investment (Burke, 2017).
The advantages are (Burke, 2017):
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LLC is more stable than corporations and partnerships.
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In case of losses, liability is limited.
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Ownership can easily be transferred.
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LLC usually attracts investors.
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LLC has few corporate formalities to observe.
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Tax flexibility is greater than in corporations.
The disadvantages are (Burke, 2017):
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It is a lengthy and complicated process to start LLC.
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Owners are subject to double taxation.
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Speculation on the stock exchange may produce a negative impact on stakeholders.
Business in Colorado
The business I am going to start is a network of small shops that will offer consumers organic, chemical- and preservative-free food and beverages (including delivery service), that will make an alternative to products in supermarkets. Since the purpose of the business to provide elite, high-quality products with a short life, it would be reasonable to opt for partnership as it would make it easier to organize delivery services. To start my business in Colorado, I must (Steingold, 2015):
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register it for an unemployment account;
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pay premiums depending on the form of business organization;
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submit premium and wage reports;
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ensure the proper classification of workers (employees or independents contractors);
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verify their compensation coverage;
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verity compliance with minimal wage and pay regulations.
Partnerships in Colorado have to meet the following requirements (Steingold, 2015):
A business name must be chosen before any legal action.
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A Statement of Trade name has to be filed.
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Partners must have a signed agreement.
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All required licenses, permissions, certificates, and zoning clearance have to be obtained.
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Partners must have an Employer Identification Number.
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Partnership requires a business bank account to keep business and individual finances separate.
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Any business has to obtain general liability insurance against unpredicted events.
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After the business is started, taxes have to be paid in due time.
Three alternative forms that I consider are:
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Sole Proprietorship (since it would allow me to avoid excessive red tape and save costs);
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Limited Partnership (as it would be reasonable to limit the liability of a partner by the extent of his/her investment);
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LLC (since according to the laws of the state, it provides personal protection of liability and pass-through taxation).
The only type of business entity that will not suit my idea is corporation since the business is aimed to fill a small niche in the market and has a particular target customer.
References
Burke, W. W. (2017). Organization change: Theory and practice. Thousand Oaks, CA: Sage Publications.
Daft, R. L. (2015). Organization theory and design. Boston, MA: Cengage Learning.
Steingold, F. S. (2015). Legal guide for starting & running a small business. Berkeley, CA: Nolo.
