Types of Business Organization

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Table of Contents

Introduction
Types of Business Organizations
Conclusion
References

Introduction

Michael Jenkins theorized (1980) that the entrepreneur can choose the sole proprietorship organization to ensure quickness in terms of business formation and decision making activities. The entrepreneur’s goal is use revenue to reduce poverty (Heavey, 2008). Each business organization has some advantages.

In terms of capital, the sole proprietorship is characterized as having the least investment compared to the other types of business endeavors. The partnership is exempt from tax payments; the individual partners are required to include the partnership profits in their individual income returns processing. In addition, the research focuses on both the C Corporation and the S Corporation. The goals and objectives of the business entrepreneur influence the type of organization chosen.

Types of Business Organizations

Sole Proprietorship

Feldman (Feldman, 2007) emphasized that there are some advantages in setting up a sole proprietorship organization. In terms of the law, the owner of the business is singularly responsible for all acts and omissions of the sole proprietorship. The term simply means that there is only one business owner running the entire business operation.

The individual or person owns all the assets, liabilities, capital, revenues, expenses, and other expenses of the sole proprietorship. Likewise, the sole proprietorship is the easiest type of organization in terms of compliance with legal policies.

In terms of taxation, the sole proprietor is exempted from paying the higher tax rates charged by the Internal Revenue Service covering the S corporation and E organization. The sole proprietor includes the profit generated from the sole proprietorship in the filing of the investors’ income tax returns.

In terms of accounting, Stickney (Stickney, 2009) emphasized the sole proprietor receives all the profits as well as expenses and costs generated by the company. This is the easiest organization type to engage in and record in the accounting records. This contention is based on the premise that the sole proprietor has lesser clients or business transactions compared to the partnership organization, S Corporation, and C Corporation. business trans

In terms of other implications, Rich (2009) opined the sole proprietor can move faster than the other types of organizations because the sole proprietor is not constrained by the agreements signed by the partners, or incorporators of the business organization.

Partnership

Denis Clifford (2008) reiterated there are some advantages in setting up a partnership type of business organization. Two or more persons can infuse more money, industry, and other resources in the business when compared to the capital investment of the sole proprietor.

In terms of the law, two or more persons can form a partnership. The partners are legal agents authorized to transact in the name of the partnership. The partners can sell, buy, borrow, or close the partnership business any time during the life of the partnership.

Consequently, all the other partners, especially the silent, inactive, absent, secret, or dormant partners are bound in the same manner as the sole partner who entered into business transactions for the sake of the partnership. The partners can act or omit an act to ensure the partnership benefits from the act or omission.

The act or omission must focus on attaining partnership goals and objectives. The limited partner is not personally liable for all the obligations incurred by the general partners or other partners. The partnership is exempted from paying the unemployment tax. In terms of taxation, the partnership is exempted from filing and paying income tax.

On the other hand, the individual partners must report their share of the partnership income in their individual income tax returns. In terms of accounting, the transactions are recorded under partnership accounting principles. The partnership profits are divided among the partners using a predetermined partnership profit division. The accounting officer will close the partnership if one or more of the partnership qualified.

In terms of other implications, the general partners are personally liable for all the losses and liabilities of the partnership. The limited partner is only liable up the maximum amount invested in the partnership. For example, the partnership generates a net loss of $ 500,000 in a partnership composed of four (4) persons.

Each partner will receive, for example, an equal share of the $500,000 net loss. If limited partner George Bush III invested $50,000 in the partnership, Mr. Bush will only be liable up to the total amount invested, $ 50,000. All the 50 states, including District of Columbia, allow a person to enter the partnership on a limited partnership basis. However, the general partner is not allowed to a limited partner.

The general partner, usually the general manager, is liable for all partnership liabilities and losses up t the amount exceeding the partnership manager’s contributions. One reason is that the managing partner may be the major cause of the partnership losses.

C Corporation

Daniel Sitarz (, 2000) proposed the C Corporation is an artificial being separate or distinct from the owners of the business. As an artificial person, the C Corporation can transact business in its name. The business transactions include buying raw materials, hiring workers, constructing its store, office, and facilities.

The corporations’ acts or omission of an act is not the act of the individual stockholders. Thus, the stockholders are not liable for the acts of the corporation. Any person can own a part of a C Corporation by investing their scarce money resources in the corporation.

In terms of the law, the C Corporation will not dissolve when one of the stockholders (part owners) of the C Corporation dies. The C Corporation files and pays its own taxes. This is contrary to the sole proprietor’s and the partners’ compulsory filing of their own income tax returns. The Federal and State laws permit the C Corporation to offer fringe benefits to its growing worker population. There are some advantages setting up the C Corporation.

In terms of the law, the C Corporation is a separate entity from the investors in the corporation. The incorporators of the C Corporation should submit their articles of C Corporation with the state agency that approves corporation charters. The C Corporation shall incur additional production and marketing costs and expenses during the C Corporation’s life. In addition, the C Corporation is required to pay income taxes.

In terms of taxation, the fringe benefits given to the C Corporations’ employees as salaries, bonuses, prizes, promotions, and other fringe benefits reduce the C Corporation’s taxes. Another advantage is that the C Corporation can reduce 70 percent of the dividend income from the individual members’ scarce money resources. The law also offers a tax break for individuals investing their assets in a small C Corporations.

In terms of accounting, the accountant records the daily business transaction of the C Corporation in terms of journal entry method or memorandum entry methods.

Leonard Jackson (2011) affirmed the accountants take in to consideration the investors’ main goal to generate dividends from the C Corporation’s activities. The stock investments are classified as subscribed capital stock or capital stock listed under the equity section of the C Corporation balance sheet.

In terms of other implications, many investors prefer C Corporations over the other organization types. Since there are more C Corporation investors compared to the sole proprietorship and the partnership, the investors are confident that the Corporation will have more funds needed to extent the businesses stare.

S Corporation

Robert Jamison (2008) emphasized the S Corporation is also known as the Subchapter S Corporation. The stockholders of the S Corporation have the semblance of a C Corporation. However, the S Corporation has advantages not found in the C Corporation.

In terms of the law, the S Corporation stockholders have limited liability during times when the company generates losses from the company’s daily business transactions. The S Corporation is legally considered a partnership.

In terms of taxation, the S Corporation is taxed as a partnership. On the other hand, the C Corporation pays its taxes based on a higher tax rate compared to the partnership’s tax rate. The S Corporation can take advantage of reducing school activities. The business partnership is exempted from the payment of taxes.

In terms of accounting, the accounting employees will record the S Corporation with emphasis on classifying the S Corporation as a partnership. The accounting people will include the benefits of using the S Corporation in the preparation of the balance sheet and income statement. Consequently, the stockholders of the S Corporation shall include the dividend received from the S corporation in the individual members’ income tax data.

Conclusion

IN A NUTSHELL, the goals and objectives of the business entrepreneur influences the type of organization chosen. Each business organization has its advantages. In terms of capital, the sole proprietorship includes the least investment compared to the other types of business endeavors.

The partnership is exempt from tax payments; the individual partners are required to include the partnership profits in their individual income returns processing. The S Corporation is a partnership type of C Corporation. Indeed the entrepreneur can choose the sole proprietorship business organization to ensure quickness in terms of business formation and speed in terms of decision making activities.

References

Clifford, D. (2008). Form a Partnership. New York: Nolo Press.

Feldman, M. (2007). Crash Course in Accounting and Financial Analysis. New York: Wiley & Sons Press.

Heavey, J. (2008). Henry George,Emile de Laveleye, and the Issue of Peasant Proprietorship. The American Journal of Economics and Sociology , 67 (1), 47-60.

Jackson, L. (2011). Performance Comparison of Lodging REITs, Hotl C Coporations and Resorts and Casinos. Tourism Economics Journal , 17 (1), 91-106.

Jamison, R. (2008). S Corporation Taxation. New York: CCH Press.

Jenkins, M. (1980). Starting and Operating A Business in the United States. New York: Running Media Press.

Rich, J. (2009). Cornerstone of Financial & Managerial Accounting. New York: Cengage Press.

Sitarz, D. (2000). C Corporations: Small Business Start-up Kit. New York: Nova Press.

Stickney, C. (2009). Financial Accounting. New York: Cengage Press.

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