Business Studies

Meaning and Types of Business Structure

Nini Ezeugo - Mon, 22nd April, 2019 @ 22:29: PM

What is a Business Structure?

A business structure is a type of organization that is legally backed and recognized within a country or state. Before starting a business, one will need to choose the best possible structure for his or her intended business. The larger the business structure, the larger the sum of money required to start and run such business. The type of business structure will also reflect the amount of tax paid on the business. Oftentimes people start with a small business structure; let’s say sole proprietorship for instance because it may requires a small capital.  As the business grows, one may wish to change the structure of the business in order to accommodate its growth. This change as a result of business growth will also result in an increased the tax liability.
Below are the different types of business structure:

 

1. Sole Proprietorship

This is a one man or woman business. If the man or woman is married, both parties can still be considered as a sole proprietorship. They happen to be the easiest business structure to start because the business capital is not necessary huge. The taxation of a sole proprietor can be significantly lower when compared to other forms of business structure. The sole traders have got total control over their business because all decision concerning the business is made by them. On the other hand, they are liable for all the loss and debt incurred in the business. Nowadays, obtaining loans to begin a sole proprietorship business structure is easier compared to the past where one will need to depend on their personal income or the use of collaterals.

Advantages of Sole Proprietorship
  • You are your own boss.
  • Low capital to start.
  • You enjoy complete secrecy.
  • All the profits belongs to you.
  • You can easily change your legal structure.
Disaadvantages of Sole Proprietorship
  • Very difficult to go on vacation.
  • Difficult in raising capital.
  • You pay all the tax.
  • The business dies without your presence.
  • You will pay for all liabilities.

 

2. Partnership

Partnership consists of people (2 - 20 people and not including married couples) coming together with the intentions to utilize their money and skills for the purpose of building a business together. A member in the partnership may take loan on behalf of the partnership business structure provided the legal agreement permits it. Partnership can be of two forms: General partnership and Limited partnership.

In general partnership, all the partners contributes their money and skill to manage the business. They equally share the profit from this business structure and bear the loss together. They will also share equally any debt incurred in their business. 

A limited partnership may consist of both a general partnership and the limited partnership. The limited partners are actually limited in the business because they have no control over the business. They serve only as investors in the business and accept a lesser liability when things go wrong in such business; unlike the general partners who operate the business and will accept a greater liability compared to the limited partners.

Advantages of Partnership
  • More startup capital is made available.
  • Easy to establish.
  • Your partners may be more knowledgeable (and becomes of great value to the business).
  • There is a better chance of getting loans.
Disdvantages of Partnership
  • Risk of disagreement between partners.
  • You may be liable for your partner's debt.
  • You may be liable for the negative business actions of your partner.
  • Debt liabilities can be unlimited.

 

3. Limited Liability Company (LLC)

The Limited Liability Company business structure combines the advantages of sole proprietorship and partnership. It is formed by a group of people who have legally agreed to the general management of the business. The tax payment applies to each member of the Limited Liability Company.

Advantages of a Limited Liability Company
  • There is a limited liability on the part of the investor (since it's limited to each person's investment).
  • There is freedom in management as there is no need for a board of directors and frequent meetings.
  • There is no limit to the number of individuals involved.
Disdvantages of a Limited Liability Company
  • It can be capital intensive.
  • Tax fee may be higher.
  • There may be strict government laws concerning the business.

 

4. Corporation

A corporation is a legal entity where a group of people called investors buy shares which becomes the evidence of being a member of the corporation. The cooperation be profit or nonprofit oriented.

The nonprofit corporation will usually have a specific goal outside making profit. These goals are usually of benefit to a certain group of people in the society, for instance, the widows, less privileged, physically challenged and so on. In a profit oriented corporation, the liabilities and benefits goes beyond a single individual.

Advantages of a Corporation
  • Liability is limited to the amount invested by the shareholders.
  • Easy transfer of ownership via the selling of shares.
Disdvantages of a Corporation
  • Shareholders may pay tax twice (on their income and dividends).
  • The investors may have very little knowledge on how the corporation is managed.

 

5. Franchise

For a franchise to be established, the go-ahead is often given by a parent company (called the franchisor) before the other person or group (called the franchisee) can carry out related commercial activity on behalf of the franchisor. For instance, a parent company that produces drugs may require an individual or a group or another company (the franchisee) to become the official distributor for the parent company’s product.

Note: A franchisee is a individual or company that has been liscensed to do business on behalf of another company called the franchisor. The franchisee will have to purchase a franchise from the franchisor.

Advantages of a Franchise
  • Small business owners will enjoy the benefits of the larger business network.
  • Experience may not be a necessity to begin a franchise since the parent company (franchisor) may provide the trainings needed.
  • You may acquire products for free and pay back after sales have been made.
  • The franchisor may run adverts on their products. (This is of benefit of the franchisee).
Disdvantages of a Franchise
  • The franchisee may have to pay some amout of money before a franchise can commence.
  • There need to be a formal agreement before a franchise can exist.
  • The attitude of some franchisee or markerters may bring disrepute for the franchisor.

 

6. Tenants in common

This form of business structure will enable two or more persons acquire the same business space even though each person is solely responsible for his or her own profit and loss during the business activity. For instance, two persons may share a shop with the purpose of uniquely running their respective business in it. Another example is when two unrelated persons buys a house after which they both live with their families in different apartments within the same house.

Advantages of Tenants in common
  • A  tenant may have less than 30% of the property and still enjoy the entire property as the other tenant with 70% ownership.
  • It can give a tenant the satisfaction and comfort that they can't normally enjoy with regards to their financial strength.
Disdvantages of Tenants in common
  • A tenant can suddenly sell the share of his or her property without proper consultation of the other tenants. This is why a comprehensive legal agreement should be put in place before becoming tenants in common.
  • When a tenant dies, his wife and children assumes control of his property and may do whatever they wish with it.

 

7. Trust

A trust business structure is based on trust and will often require a legal structure to begin with. The trustee is assigned with the privilege of managing the business or property of another person referred to as the beneficiary.

Advantages of a Business Trust
  • The trust beneficiary is not liable for the trust debts.
  • The tax paid by the trust beneficiary will be based on the amount of income they receive from the trustee.
Disdvantages of a Business Trust
  • The trustee works only for the benefit of the beneficiary.
  • A business trust may require a complicated legal structure.
  • Starting a business trust may be cost demanding.

 

8. Association

An association is a group of people coming together with the intentions of supporting each other. The members of an association are usually of similar occupation. For instance, we may have the association of barbers, associations of tailors and so on. The members generally contribute to the growth of the association.

Advantages of a Business Association
  • They enjoy the opportunities and fun that comes along with social gatherings.
  • It gives advantage to a member vying for a political office.
  • It provide a form of networking which can increase the growth of a business.
Disdvantages of a Business Association
  • Embezzlement of funds.
  • Members may be asked to pay unnecessary fines.

 

9. Joint Venture

This business structure is formed by two or more persons (or organizations) only for a limited time frame. They carry out their business within the stipulated time before going their separate ways.

Advantages of a Business Joint Venture
  • The liabilities are shared.
  • There is a better chance of networking.
  • There is a increased capacity (two heads are better than one).
Disdvantages of a Business Joint Venture
  • The partners may have a hidden aim.
  • The partners may have different objectives.
  • One of the partners may be cheated.

 

10. Municipality

This is a public corporation established by the local government.

Topics in Business Studies

Scope of Business and Management Studies Disadvantages of Money Principle of Double Entry Clerical Staff, their Qualities and Functions Meaning and Types of Business Structure



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