Forms of Business Organization

One of the first decisions you’ll make as a business owners is how your business will
be structured. You need to know the advantages and disadvantages of each of the
different forms of business organization to make sure you make the right decision
for your new business.

All businesses must adopt some legal configuration that defines the rights and
liabilities of participants in the business’s ownership, control, personal liability,
lifespan and financial structure. The form of business determines which income tax
return form to file and the company’s and owner’s legal liabilities.

This is a big decision that has long-term implications, so if you’re unsure of which
form of business is best for your company, consult a professional. Luckily, there are
several business counselors and centers across Kansas City offering free assistance
in forming a business that are knowledgeable and ready to help.

When you form your new business, account for the following:

- Your (practical) vision regarding the size and nature of your business

- The level of control you wish to have

- The level of “structure” you are willing to deal with

- The business’s vulnerability to lawsuits

- Tax implications of the different organizational structures

- Expected profit (or loss) of the business

(The Sole Proprietor)

Many businesses are sole proprietorships, firms owned and operated by a single
person. When a person decides to open an independent business, that person is
then entirely responsible for its success or failure. Any profits go to the owner; any
losses are his or her responsibility as well. If the losses prove to be greater than the
investment, the individual is responsible for paying them, even if this depletes all
personal assets.

One of the advantages of a sole proprietorship is that an owner can make decisions
quickly and decisively without having to consult others. And an individual
proprietor, by law, pays fewer taxes and at a lower rate than does a corporation.

There are disadvantages to this form of business organization, however. A sole

proprietorship ends with the incapacity or death of the owner. The assets can be
inherited by a person who may then become the operator, but legally the business
dies with its owner. Also, since it is dependent upon the amount of money the
owner has saved or can borrow, usually it does not develop into a large-scale
enterprise.

Sole proprietorship

The vast majority of small businesses start out as sole proprietorships. These
businesses usually are owned by one person, aka the individual who has day-to-day
responsibility for running the business. Sole proprietors can be independent
contractors, freelancers or home-based businesses.

Sole proprietorship advantages

- The owner receives all profits.

- Profits are taxed only once.

- The owner makes all decisions and is in complete control of the company (but this
could also be a disadvantage).

- It is the easiest and least expensive form of ownership to organize.

Sole proprietorship disadvantages

- There is unlimited liability if anything happens in the business. Your personal

assets are at risk (including your home in Kansas City).

- It is limited in raising funds and the owner might have to acquire consumer loans.

- There is no separate legal status.

Partnerships

In a partnership, two or more people share ownership of a single business. Like

proprietorships, the law does not distinguish between the business and its owners.
The partners should have a legal agreement that establishes how decisions will be
made, how profits will be shared, how disputes will be resolved, how future
partners will be admitted to the partnership, how partners can be bought out or
what steps will be taken to dissolve the partnership when needed.

Partnership advantages

- It is easy to establish (with the exception of developing a partnership agreement).

- Separate legal status gives liability protection.

- Profits are taxed only once.

- Partners may have complementary skills.

Partnership disadvantages

- Partners are jointly and individually liable for other partners’ actions.

- Profits must be shared with the partners.

- Decision making is divided.

- Business can suffer if the detailed partnership agreement is not in place.

Corporations

A corporation is considered by law to be a unique entity, separate from those who

own it. A corporation can be taxed, sued and enter into contractual agreements.
The corporation has a life of its own and does not dissolve when ownership
changes.

Corporation

A corporation is an organization—usually a group of people or a company—authorized by the state to

act as a single entity (a legal entity; a legal person in legal context) and recognized as such in law for
certain purposes. Early incorporated entities were established by charter (i.e. by an ad hoc act granted
by a monarch or passed by a parliament or legislature). Most jurisdictions now allow the creation of new
corporations through registration.

Corporations come in many different types but are usually divided by the law of the jurisdiction where
they are chartered into two kinds: by whether they can issue stock, or by whether they are formed to
make a profit .[1] Corporations can be divided by the number of owners: corporation aggregate or
corporation sole. The subject of this article is a corporation aggregate. A corporation sole is a legal entity
consisting of a single ("sole") incorporated office, occupied by a single ("sole") natural person.

Cooperative

A cooperative (also known as co-operative, co-op, or coop) is "an autonomous association of persons
united voluntarily to meet their common economic, social, and cultural needs and aspirations through a
jointly-owned and democratically-controlled enterprise".[1] Cooperatives may include:

 businesses owned and managed by the people who use their services (a consumer cooperative)
 organizations managed by the people who work there (worker cooperatives)
 multi-stakeholder or hybrid cooperatives that share ownership between different stakeholder
groups. For example, care cooperatives where ownership is shared between both care-givers
and receivers. Stakeholders might also include non-profits or investors.
 second- and third-tier cooperatives whose members are other cooperatives
  platform cooperatives that use a cooperatively owned and governed website, mobile app or a
protocol to facilitate the sale of goods and services.

Defining Your Purpose to be in Business

Whether you are starting a new company or improving an existing one, you need to define your
purpose or reason for running the business.

Typically, there are three reasons to start or operate a business. They are to make money, to
gain satisfaction from working in a field of interest, and to benefit others. The order of the
reasons depends on your personal goals and whether the business is a for-profit business or
non-profit organization.

After you have clarified your purpose, you need to establish the means to achieve that purpose
or your business concept.

Questions you may have include:

What are the purposes in a for-profit business?

What are the purposes in a non-profit business?

What about a business concept?

Business for profit

If you have a business for profit, you can define your purpose to be in business by examining
your reasons and their order of importance. They are usually to make money, to gain
satisfaction, and to benefit society.

Make money

Making money is a primary motivation in starting and improving a business entity. Owners or
stockholders want to earn profits.

Money is usually the first goal of an entrepreneur, followed by the other two purposes.

The reason to improve business operations is to increase profits.

Satisfaction

The secondary motivation is to provide some sort of satisfaction or enjoyment for the owner.
People usually start and run businesses in areas that they are interested in and enjoy.
When others involved in the business are also enamored with the products or line of work, the
business usually prospers.

Workers at Harley-Davidson Motorcycle Co. love their Harley's. Likewise, workers at Apple
Computers love Apple products.

Benefit society

The third reason to run a business is to be able to help others and to do good for society. It is
true that leaders of many companies don't think about helping others, but the ones that are
truly fulfilled and the companies that are truly successful realize that this is also important.

Some have another order

There are companies that are run with these three items in a different order. This is similar to
people who have a hobby they enjoy and that is their primary motivation. Getting money for
them is just something extra.

Non-profit organization

The motivations to start and operate a non-profit organization are the same as for a business,
except that the emphasis is changed.

Helping others

The primary purpose of a non-profit organization is to help those in need, to solve a social
problem, and/or to benefit society.

On the other hand, the purpose of a non-profit organization or government agency is to

provide a specific service that will fulfill a need and benefit its constituents.

Gaining funding

A secondary motivation for a non-profit is to gain funding in order to remain a viable entity.

In order to fulfill the primary purpose of helping others, your non-profit organization is still a
business that needs money to continue functioning. Such organizations primarily depend on
donations, but often they are in exchange for a service (like a church service) or some product
(some send stamps in the mail).

Interesting cause

People who get involved in charitable or non-profit organizations usually do so because they
are interested and concerned about the charity, and they enjoy doing the work they do.
Means to achieve purpose

The means to achieve your purpose for starting or running a business boils down to getting a
great idea of a product or service. This is often called the business concept.

The company needs a means to achieve the purpose of making money. The owners must have
an idea of a product or service to provide to a specific market or group of people (customers)

A non-profit organization or government agency needs a means to solve problems of its

constituents. Their idea is to provide a specific service that will fulfill a need and benefit its
constituents.

Summary

It is important to define your purpose or reason for running the business. Reasons to start or
operate a business are to make money, to gain satisfaction, and to help others. Their order
depends on your personal goals and whether the business is a for-profit business or non-profit
organization.

After you have clarified your purpose, you need to have a great idea or business concept that
provides the means to achieve your goals.

The primary purpose for starting a business is usually financial. Many people who are
dissatisfied when working for someone else, or who have been involuntarily laid off, start their
own businesses to support themselves. A business can also be a way to become more involved
in something you are passionate about, whether it is woodworking or outdoor adventure.

Money

Successful businesspeople have the opportunity to earn far more money than they would if
they were working for someone else. Ambitious individuals often become frustrated with the
limitations that are imposed on them within the confines of someone else's business. Starting
your own business means that your income is dependent, not on what someone else is willing
to pay you, but on your own ability to succeed and excel in the marketplace. Once your
business has broken through to the big time, your income is limited only by market conditions
and your own management.

Control

While it is certainly risky to start your own business, it also allows you to be more personally in
control of your financial future. When working for someone else, you may be subject to a layoff
through no fault of your own. Particularly in a slow economy, starting your own business can
increase your chances of success, even though starting a business in a slow economy has its
own inherent risks. People who are confident in their ability to handle their own affairs are
often happier when running their own business, even with the increased risks, responsibilities
and stresses.

Adventure

Many jobs, even well-paid ones, are quite boring for a person who enjoys adventure. What
feels like security to one employee may feel like imprisonment to another. The excitement of
the marketplace is irresistible to a certain type of entrepreneur, and these people will pursue
their own businesses simply for the adventure, regardless of how much profit might be likely.
Whether the venture involves international import-export, adventure rafting or independent
accounting that manages other people's fortunes, the fact that you are in charge of your
success or failure when you are running things can be very exhilarating to a person who values
innovation over security.

Service

Some businesses are founded primarily for the purpose of serving the local community or the
world at large. Nonprofit businesses are dedicated to working with the poor, the disadvantaged
and those stricken by disaster, but many for-profit businesses also provide useful and essential
services to the public. A local grocery store can provide a decent living for its owner, while also
making good food locally available to surrounding residents. This is an example of a healthy
interaction between self-interest and community service.

Economic Development and Business

Small and large businesses drive economic stability and growth by providing valuable services,
products and tax dollars that directly contribute to the health of the community. They also
provide jobs, strengthening the economic health of each community where a business is based.
Even if a business is headquartered elsewhere, employing people at each local business
contributes to the success of that region, as with the wages they earn, people buy property,
work, shop and otherwise invest in where they live.

Taxes are used, among other things, to maintain the infrastructure of a city, state or country –
roads, bridges, tunnels, public transportation, libraries and other public buildings and services,
including police officers and firefighters, all benefit from tax money collected from individuals
and businesses. These services are essential to the good health and positive qualities of local
and national citizens. In a capitalist society like that of the United States, business growth and
increased sales means collecting more taxes, which can directly translate to better maintenance
and offerings of local infrastructure and services that benefit the community.

World Economy and Business

The success of business as a whole directly affects the world’s economy. At its core, businesses are
designed to serve a particular need that people have, and to provide trusted goods and services related
to that need. When consumer confidence or trust dips in business, it isn’t just sales that are negatively
affected. This mistrust has a ripple effect and can result in a decline in a country’s general economy,
weakening the strength of its currency and buying power.

As businesses focus more and more on providing value to shareholders instead of directly to consumers,
their interests and tactics may not align with the best interests of the consumer. A “profit at any cost”
model can have extremely negative implications down the road if corners are cut and poor decisions are
made in the name of solely working to increase shareholder profit or are based purely on greed. No
matter how efficiently you make a product or how special the service is that you deliver, if you lose
consumer confidence as a result of your business decisions, consumers won’t support you by purchasing
your goods and services, and then nobody benefits.