7 Types of Business Organisation You Should Know
Are you planning to start a business or expand your existing one? If so, you need to choose the right type of business organisation for your venture. A business organisation is a legal entity that defines how a business is owned, managed, and operated. There are different types of business organisation, each with its own advantages and disadvantages. In this article, we will explore the various types of business organisation and their features.
1. Sole Proprietorship
A sole proprietorship is the simplest and most common type of business organisation. It is a business owned and run by one person, who is responsible for all aspects of the business. The sole proprietor has full control over the business decisions, profits, and losses. The sole proprietor also bears all the risks and liabilities of the business.
The advantages of a sole proprietorship are:
– It is easy and inexpensive to set up and operate.
– It has minimal legal formalities and regulations.
– It offers flexibility and autonomy to the owner.
– It allows the owner to keep all the profits.
The disadvantages of a sole proprietorship are:
– It has limited access to capital and resources.
– It has unlimited personal liability for the debts and obligations of the business.
– It has limited continuity and transferability of the business.
– It may face difficulty in competing with larger businesses.
2. Partnership
A partnership is a type of business organisation where two or more people agree to share the ownership, management, and profits of a business. The partners contribute money, property, skills, or services to the business and share the risks and rewards. There are different types of partnership, such as general partnership, limited partnership, and limited liability partnership.
The advantages of a partnership are:
– It is relatively easy and inexpensive to form and operate.
– It has more access to capital and resources than a sole proprietorship.
– It benefits from the combined skills, expertise, and experience of the partners.
– It enjoys tax benefits as the profits are taxed only once at the personal level.
The disadvantages of a partnership are:
– It has unlimited personal liability for the debts and obligations of the business, unless it is a limited liability partnership.
– It may have conflicts and disagreements among the partners over the management and distribution of profits.
– It has limited continuity and transferability of the business, unless it is a limited liability partnership.
– It may face difficulty in raising additional funds from external sources.
3. Corporation
A corporation is a type of business organisation that is a separate legal entity from its owners. A corporation is owned by shareholders who elect a board of directors to oversee the management of the business. A corporation can issue shares of stock to raise capital from investors. There are different types of corporation, such as C corporation, S corporation, and B corporation.
The advantages of a corporation are:
– It has unlimited access to capital and resources from various sources.
– It has limited liability for the debts and obligations of the business, as the shareholders are only liable up to their investment.
– It has perpetual existence and transferability of ownership, as the shares can be bought and sold freely.
– It may enjoy economies of scale and scope due to its large size and scope.
The disadvantages of a corporation are:
– It is complex and expensive to form and operate, as it requires legal formalities and regulations.
– It may face double taxation, as the profits are taxed at both the corporate and personal levels, unless it is an S corporation or a B corporation.
– It may have conflicts of interest between the shareholders and the managers over the goals and performance of the business.
– It may face social and environmental responsibilities and pressures from various stakeholders.
4. Cooperative
A cooperative is a type of business organisation that is owned and controlled by its members, who are also its customers or suppliers. A cooperative operates on the principle of mutual benefit, where the members pool their resources and share the profits according to their participation or contribution. There are different types of cooperative, such as consumer cooperative, producer cooperative, worker cooperative, and service cooperative.
The advantages of a cooperative are:
– It is democratic and participatory, as each member has one vote in decision making regardless of their investment.
– It is socially responsible and ethical, as it aims to serve the needs and interests of its members and community.
– It offers lower prices and better quality products or services to its members due to its non-profit motive.
– It enjoys tax benefits as it is exempt from income tax on its surplus.
The disadvantages of a cooperative are:
– It may have limited access to capital and resources due to its reliance on member contributions.
– It may have lower efficiency and innovation due to its lack of competition and incentive.
– It may have conflicts and disagreements among the members over the management and distribution of surplus.
– It may face difficulty in attracting and retaining skilled managers due to its lower compensation and prestige.
5. Franchise
A franchise is a type of business organisation where a franchisor grants a franchisee the right to use its name, trademark, products, or services in exchange for a fee and a share of the profits. A franchise is a form of contractual relationship between two independent parties, where the franchisor provides the franchisee with training, support, and quality control. There are different types of franchise, such as product franchise, service franchise, and business format franchise.
The advantages of a franchise are:
– It offers a proven business model and brand recognition to the franchisee, which reduces the risk of failure.
– It provides the franchisee with training, support, and quality control from the franchisor, which enhances the performance and customer satisfaction.
– It allows the franchisee to benefit from the franchisor’s marketing and advertising efforts, which increases the customer base and loyalty.
– It enables the franchisor to expand its business and reach new markets with lower costs and risks.
The disadvantages of a franchise are:
– It requires the franchisee to pay a high initial fee and ongoing royalties to the franchisor, which reduces the profits.
– It restricts the franchisee’s autonomy and creativity, as the franchisee has to follow the franchisor’s rules and standards.
– It exposes the franchisee to the franchisor’s reputation and performance, which may affect the customer perception and demand.
– It may create conflicts and disputes between the franchisor and the franchisee over the terms and conditions of the contract.
6. Nonprofit Organisation
A nonprofit organisation is a type of business organisation that operates for a social or charitable purpose rather than for profit. A nonprofit organisation is funded by donations, grants, or membership fees from individuals, foundations, or governments. A nonprofit organisation is governed by a board of trustees or directors who oversee its mission and activities. There are different types of nonprofit organisation, such as charitable organisation, educational organisation, religious organisation, and social organisation.
The advantages of a nonprofit organisation are:
– It serves a noble cause and makes a positive impact on society and environment.
– It enjoys tax benefits as it is exempt from income tax on its revenue.
– It attracts volunteers and donors who share its vision and values.
– It builds trust and credibility with its stakeholders due to its transparency and accountability.
The disadvantages of a nonprofit organisation are:
– It faces challenges in raising funds and resources due to its dependence on external sources.
– It has difficulty in measuring and evaluating its performance and impact due to its intangible goals and outcomes.
– It may have conflicts and trade-offs between its mission and financial sustainability due to its limited resources.
– It may face competition and regulation from other nonprofit organisations or governments.
7. Social Enterprise
A social enterprise is a type of business organisation that combines the social or environmental mission of a nonprofit organisation with the financial sustainability of a for-profit business. A social enterprise generates revenue from selling products or services that create social or environmental value. A social enterprise reinvests its profits into its mission or distributes them to its stakeholders. There are different types of social enterprise, such as social business, social cooperative, social venture, and social innovation.
The advantages of a social enterprise are:
– It creates a positive change in society and environment through its products or services.
– It achieves financial sustainability and independence through its revenue streams.
– It attracts customers and investors who support its mission and values.
– It fosters innovation and creativity through its problem-solving approach.
The disadvantages of a social enterprise are:
– It faces challenges in balancing its social or environmental mission with its financial goals.
– It has difficulty in accessing capital and resources due to its hybrid nature.
– It may have conflicts and dilemmas between its stakeholders over the distribution of profits or impact.
– It may face competition and regulation from other businesses or governments.
Global Demand for Different Types of Business Organizations
According to a report by the World Bank, the global demand for different types of business organizations varies depending on the level of economic development, institutional quality, and regulatory environment of each country. The report found that corporations are more prevalent in high-income countries, while partnerships and sole proprietorships are more common in low-income countries. The report also found that limited liability companies (LLCs) are gaining popularity in many regions, especially in Europe and Central Asia, due to their flexibility and tax advantages. The report suggested that improving the legal and regulatory framework for business organizations can foster entrepreneurship, innovation, and economic growth .
The Advantages and Disadvantages of Each Type of Business Organization
Each type of business organization has its own advantages and disadvantages, depending on the goals, resources, and preferences of the owners. Some of the main factors to consider when choosing a type of business organization are:
– Ownership: Who owns the business and how much control do they have over it?
– Liability: How much personal risk do the owners face for the debts and obligations of the business?
– Taxation: How is the income and profit of the business taxed by the government?
– Management: How is the business run and who makes the decisions?
– Continuity: How long does the business last and what happens if an owner dies or leaves?
Sole proprietorships are the simplest and most common type of business organization. They are owned and operated by one person who has full control over the business. They are easy to set up and dissolve, and they have minimal legal and regulatory requirements. However, sole proprietors face unlimited personal liability for the debts and obligations of the business, and they may have difficulty raising capital or expanding their operations. They also pay taxes on their business income as part of their personal income tax .
Partnerships are formed by two or more people who agree to share the ownership, profits, and losses of a business. They can be general or limited, depending on the degree of involvement and liability of each partner. Partnerships are relatively easy to establish and allow partners to pool their skills, resources, and contacts. However, partnerships also entail joint and several liability for the debts and obligations of the business, which means that each partner is personally responsible for the entire amount. Partnerships also face potential conflicts among partners and difficulties in transferring ownership or dissolving the business. Partnerships pay taxes on their share of the business income as part of their personal income tax .
Corporations are legal entities that are separate from their owners, who are called shareholders. Corporations can have one or more shareholders, who elect a board of directors to oversee the management of the business. Corporations have several advantages, such as limited liability for shareholders, perpetual existence, easy transferability of ownership, and access to capital markets. However, corporations also face several disadvantages, such as complex legal and regulatory requirements, double taxation (corporate income tax plus personal income tax on dividends), and potential agency problems (conflicts between shareholders and managers). Corporations can be classified as C corporations or S corporations, depending on their tax status .
Limited liability companies (LLCs) are hybrid forms of business organizations that combine some features of partnerships and corporations. LLCs are owned by one or more members who can be individuals or other entities. LLCs offer limited liability for members, flexible management structures, and pass-through taxation (no corporate income tax). However, LLCs also have some drawbacks, such as varying legal and regulatory rules across states or countries, limited life span (unless specified otherwise), and potential difficulties in raising capital or transferring ownership .
References:
https://books.google.com/books?id=zb0cItqvLJUC
https://www.oed.com/public/login/loggingin#withyourlibrary
https://en.wikipedia.org/wiki/Special:BookSources/9780314199492
https://www.oed.com/public/login/loggingin#withyourlibrary
https://www.indeed.com/career-advice/career-development/forms-of-businesses
https://corporatefinanceinstitute.com/resources/management/types-of-organizations/
https://smallbusinessify.com/types-of-business-organizations/
7 Types of Business Organisation You Should Know https://www.businessnewsdaily.com/8163-types-of-businesses.html
Types of Business Organisation https://www.investopedia.com/terms/b/business-entity.asp
What is a Business Organisation? https://www.thebalancesmb.com/what-is-a-business-entity-and-how-does-it-affect-your-business-taxes-and-liability-protection-397462
