The Form Of A Business

It would be crazy to write business articles without examining the differing formats of business available. Why do businesses exist?

In a financier’s eyes, the sole purpose of the business is to increase the wealth of the owner’s as far as possible. In the chasing of wealth, people can organise the business in several different ways. There are three basic legal business structures that organisations take on normally. Each is chosen depending on the complexity of the business, liability preference and tax considerations of the owners.

Sole trader

This is a business owned by an individual or husband and wife. The owner retains all the profits and carries unlimited liability for all losses. If things go poorly, the owner’s personal assets can be seized. It is the most similar form of business and as with, for example, a simple burger stall no special government registration is required. Earnings are simply added to the owner’s personal income and taxes are paid on the total income. However, because it is not a separate legal entity that can be sold in pieces, it is more difficult for a sole trader to raise money in the financial markets.

Partnerships

When several people get together and form a business, they often enter into a partnership. As in a sole trader, each owner’s share of the earnings is included in his or her personal tax returns. Depending on the nature of the business, there are two main types of partnership. For example, in a general partnership the general partners have unlimited liability for all business debts.

In a limited partnership, limited partners are protected from the full extent of their investment. The limited form is used to protect investing partners that do not participate in the management of the business.

Limited Companies

These are separate legal entities from the individuals that own them. In the eyes of the law, a limited company is treated as another individual who conducts his or her business. The assets and liabilities of the company are owned by the company and not by the owners. In the case of bankruptcy, the owner’s personal assets are shielded from creditors.

The company’s ownership is split into shares of stock that investors can purchase. When management decides that the company needs more money, additional shares can be issued and any investor is personally protected from any liabilities of the company.

A drawback is that that the company is double taxed in that the dividend is taxed along with the individuals.

Within the limited form, there are two variations, the C Corp and the Subchapter S Corp, which has thirty five or fewer owners who agree to include the company’s earnings as in a partnership. This way the double taxation aspect does not fall on the owners and the firm’s limited liability advantage is maintained.

Within investment, there are two main routes one can take. There is the investment area where headlines are made and there is financial management which is the work that helps companies pay the bills and make acquisitions.

Thus ends a very brief summary of business formats.

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