FORMS OF BUSINESS

Business forms and model is the single-most important choice you’ll make regarding your
company. What form your business adopts will affect a multitude of factors, many of which will
decide your company’s future. Aligning your goals to your business organization type is an
important step, so understanding the pros and cons of each type is crucial. It’s what will help in
sustaining some business operations.
The form that an entrepreneur chooses will affect:
-How the business is taxed
-entrepreneurs legal liability
-Costs of formation
-Operational costs
There are 4 main types of business organization forms:
 sole proprietorship (sole trader) partnership
 corporation
 and Limited Liability Company, or LLC.

1. Sole Proprietorship (sole trader)

The simplest and most common form of business ownership, sole proprietorship or sole trader
is a business owned and run by an individual for their own benefit. The business’ existence is
entirely dependent on the owner’s decisions, so when the owner dies, so does the business.
The legal requirements for setting up such businesses are minimum. All profits made by sole
traders are subjected to income tax rather than corporate tax levied on the company profits
Advantages of sole proprietorship:
 All profits are subject to the owner
 There is very little regulation for proprietorships
 Owners have total flexibility when running the business
 Very few requirements for starting—often only a business license
 Favourable tax rates
Disadvantages:
 Owner is 100% liable for business debts
 Equity is limited to the owner’s personal resources
 Ownership of proprietorship is difficult to transfer
 Lack of continuity

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 2. Partnership
This is the business owned, financed and controlled by at least two and not more than twenty
people with the aim of combining skills, competences in view of profit sharing. Person’s in
agreement can specify the rights and obligations of each partner depending on what that
person can do in skill or knowledge. These come in two types: general and limited. In general
partnerships, both owners invest their money, property, labor, etc. to the business and are
both 100% liable for business debts. In other words, even if you invest a little into a general
partnership, you are still potentially responsible for all its debt. General partnerships do not
require a formal agreement—partnerships can be verbal or even implied between the two
business owners.
Limited partnerships require a formal agreement between the partners. They must also file a
certificate of partnership with the state. Limited partnerships allow partners to limit their own
liability for business debts according to their portion of ownership or investment.
Advantages of partnerships:
 Shared resources provide more capital for the business
 Each partner shares the total profits of the company
 Similar flexibility and simple design of a proprietorship
 Inexpensive to establish a business partnership, formal or informal
Disadvantages:
 Each partner is 100% responsible for debts and losses
 Selling the business is difficult—requires finding new partner
 Partnership ends when any partner decides to end it
3. Coorporative
This is a business owned a controlled by a group of people who share benefits or profits. The
members of the cooperative finance and operate the business or service for their mutual
benefit. Corporative are, for tax purposes, separate entities and are considered a legal person.
This means, among other things, that the profits generated by a corporation are taxed as the
“personal income” of the company.

Advantages of a coorporative:

 Limits liability of the owner to debts or losses

 Profits and losses belong to the corporation
 Can be transferred to new owners fairly easily
 Personal assets cannot be seized to pay for business debts

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  Wider network of professional and the required skills for management of the
corporation

Disadvantages:

 Corporate operations are costly

 Establishing a corporation is costly
 Start a corporate business requires complex paperwork
 With some exceptions, corporate income is taxed twice

4. Limited Liability Company (LLC)

Similar to a limited partnership, an LLC provides owners with limited liability while providing
some of the income advantages of a partnership. Essentially, the advantages of partnerships and
corporations are combined in an LLC, mitigating some of the disadvantages of each.

Advantages of an LLC:

 Limits liability to the company owners for debts or losses

 The profits of the LLC are shared by the owners without double-taxation

Disadvantages:

 Ownership is limited by certain state laws

 Agreements must be comprehensive and complex
 Beginning an LLC has high costs due to legal and filing fees.

5. Limited company

A limited company is a legal business entity that can be formed by two or more people who
become its shareholders. It is said to be incorporated (endowed with separate body or person)
managed through a board of directors who are responsible the stock holders and the appointment
of the management team. Limited companies fall into categories; public limited company (PLC)
which must make it’s shares available to the public for purchase and the company name must

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end with words PLC and private limited company on the other hand is not compelled to make
it’s shares available or float to the public.

Requirements of registering limited company

 The company’s name

 The location of the registered office
 The objectives/purpose of the company
 A statement that the liability of members is limited
 The amount of share capital

Advantages

 In the event of failure of business, share holders are protected against the lose of more
than the nominal value of their shares.
 There are no restrictions to transfer shares from one person to another.
 The separate legal person of the company exists independently of the members.
 Possibilities of having access to external funding by using stock
 A wider network of professional and the required skills for management of the company
 Creditors face less risks since liability is limited.

Disadvantages
 The formation of the company is more complex with complicated form of administration
 It requires some legal documentations
 A lot of paper work is needed
 Double taxation as corporate income and personal income on dividends
 Entrepreneurs must share authority and decision making the board

Features of public company

 Has PLC after the name

 Formed by two people minimum but no maximum number of share holders

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  Shares are generally available through the stock exchange
 Are obligated by law to have an annual general meeting of share holders.
 They need to file the financial accounts statement to the registrar
 Financial accounts are made advertised to members and general public
 It is controlled by the board of directors who appoints the managing director and
other directors.
 Shares are easily transferable.

Features of private company

 Has limited (ltd) after the name

 Owned financed and controlled by a minimum of two people
 It is registered with the office of registrar of companies
 It does not sell it’s shares the wider public but are sold privately
 There are restrictions to transfer shares from one person to another
 It is controlled by a board of directors elected by the shareholders