Advantage and Disadvantage of Business Organization

Advantages of a Sole Proprietorship

Easiest and least expensive form of ownership to organize.
Sole proprietors are in complete control, and within the parameters of the law, may
make decisions as they see fit.
Profits from the business flow-through directly to the owners personal tax return.
The business is easy to dissolve, if desired.
Disadvantages of a Sole Proprietorship
Sole proprietors have unlimited liability and are legally responsible for all debts against
the business. Their business and personal assets are at risk.
May be at a disadvantage in raising funds and are often limited to using funds from
personal savings or consumer loans.
May have a hard time attracting high-caliber employees, or those that are motivated by
the opportunity to own a part of the business.
Some employee benefits such as owners medical insurance premiums are not directly
deductible from business income (only partially as an adjustment to income).
Advantages of a Partnership
Partnerships are relatively easy to establish; however time should be invested in
developing the partnership agreement.
With more than one owner, the ability to raise funds may be increased.
The profits from the business flow directly through to the partners personal tax return.
Prospective employees may be attracted to the business if given the incentive to
become a partner.
The business usually will benefit from partners who have complementary skills.
Disadvantages of a Partnership
Partners are jointly and individually liable for the actions of the other partners.
Profits must be shared with others.
Since decisions are shared, disagreements can occur.
Some employee benefits are not deductible from business income on tax returns.
The partnership may have a limited life; it may end upon the withdrawal or death of a
partner.
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Advantages of a Corporation
Shareholders have limited liability for the corporations debts or judgments against the
corporation.
Generally, shareholders can only be held accountable for their investment in stock of
the company. (Note however, that officers can be held personally liable for their actions,
such as the failure to withhold and pay employment taxes.
Corporations can raise additional funds through the sale of stock.
A Corporation may deduct the cost of benefits it provides to officers and employees.
Can elect S Corporation status if certain requirements are met. This election enables
company to be taxed similar to a partnership.
Disadvantages of a Corporation
The process of incorporation requires more time and money than other forms of
organization.
Corporations are monitored by federal, state and some local agencies, and as a result
may have more paperwork to comply with regulations.
Incorporating may result in higher overall taxes. Dividends paid to shareholders are
not deductible from business income; thus this income can be taxed twice.
Limited Liability Company (LLC)
The LLC is a relatively new type of hybrid business structure that is now permissible in
most states. It is designed to provide limited liability features of a corporation and the
tax efficiencies and operational flexibility of a partnership. Formation is more complex
and formal than that of a general partnership.
The owners are members, and the duration of the LLC is usually determined when the
organization papers are filed. The time limit can be continued if desired by a vote of the
members at the time of expiration. LLCs must not have more than two of the four
characteristics that define corporations: Limited liability to the extent of assets;
continuity of life; centralization of management; and free transferability of ownership
interests.
Federal Tax Forms for LLC
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Taxed as a partnership in most cases; corporation forms must be used if there are more
than 2 of the 4 corporate characteristics, as described above.
In summary, deciding the form of ownership that best suits your business venture
should be given careful consideration. Use your key advisors to assist you in the
process.
Types of Business
1. Service Business
A service type of business provides intangible products (products with no physical form).
Service type firms offer professional skills, expertise, advice, and other similar products.
Examples of service businesses are: schools, repair shops, hair salons, banks,
accounting firms, and law firms.
2. Merchandising Business
This type of business buys products at wholesale price and sells the same at retail
price. They are known as "buy and sell" businesses. They make profit by selling the
products at prices higher than their purchase costs.
A merchandising business sells a product without changing its form. Examples are:
grocery stores, convenience stores, distributors, and other resellers.
3. Manufacturing Business
Unlike a merchandising business, a manufacturing business buys products with the
intention of using them as materials in making a new product. Thus, there is a
transformation of the products purchased.
A manufacturing business combines raw materials, labor, and factory overhead in its
production process. The manufactured goods will then be sold to customers.
Hybrid Business
Hybrid businesses are companies that may be classified in more than one type of
business. A restaurant, for example, combines ingredients in making a fine meal
(manufacturing), sells a cold bottle of wine (merchandising), and fills customer orders
(service).
Nonetheless, these companies may be classified according to their major business
interest. In that case, restaurants are more of the service type they provide dining
services.

Forms of Business Organization

1. Sole Proprietorship
A sole proprietorship is a business owned by only one person. It is easy to set-up and is
the least costly among all forms of ownership.
The owner faces unlimited liability; meaning, the creditors of the business may go after
the personal assets of the owner if the business cannot pay them.
The sole proprietorship form is usually adopted by small business entities.
2. Partnership
A partnership is a business owned by two or more persons who contribute resources
into the entity. The partners divide the profits of the business among themselves.
In general partnerships, all partners have unlimited liability. In limited partnerships,
creditors cannot go after the personal assets of the limited partners.
3. Corporation
A corporation is a business organization that has a separate legal personality from its
owners. Ownership in a stock corporation is represented by shares of stock.
The owners (stockholders) enjoy limited liability but have limited involvement in the
company's operations. The board of directors, an elected group from the stockholders,
controls the activities of the corporation.
In addition to those basic forms of business ownership, these are some other types of
organizations that are common today:
Limited Liability Company
Limited liability companies (LLCs) in the USA, are hybrid forms of business that have
characteristics of both a corporation and a partnership. An LLC is not incorporated;
hence, it is not considered a corporation.
Nonetheless, the owners enjoy limited liability like in a corporation. An LLC may elect to
be taxed as a sole proprietorship, a partnership, or a corporation.
Cooperative

A cooperative is a business organization owned by a group of individuals and is

operated for their mutual benefit. The persons making up the group are called
members. Cooperatives may be incorporated or unincorporated.
Some examples of cooperatives are: water and electricity (utility) cooperatives,
cooperative banking, credit unions, and housing cooperatives.

User Financial Information

1. Owners and investors

Stockholders of corporations need financial information to help them make decisions on
what to do with their investments (shares of stock), i.e. hold, sell, or buy more.
Prospective investors need information to assess the company's potential for success
and profitability. In the same way, small business owners need financial information to
determine if the business is profitable and whether to continue, improve or drop it.
2. Management
In small businesses, management may include the owners. In huge organizations,
however, management is usually made up of hired professionals who are entrusted with
the responsibility of operating the business or a part of the business. They act as agents
of the owners.
The managers, whether owners or hired, regularly face economic decisions How
much supplies will we purchase? Do we have enough cash? How much did we make
last year? Did we meet our targets? All those, and many other questions and business
decisions, require analysis of accounting information.
3. Lenders
Lenders of funds such as banks and other financial institutions are interested in the
companys ability to pay liabilities upon maturity (solvency).
4. Trade creditors or suppliers
Like lenders, trade creditors or suppliers are interested in the companys ability to pay
obligations when they become due. They are nonetheless especially interested in the
company's liquidity its ability to pay short-term obligations.
5. Government
Governing bodies of the state, especially the tax authorities, are interested in an entity's
financial information for taxation and regulatory purposes. Taxes are computed based
on the results of operations and other tax bases. In general, the state would like to know
how much the taxpayer makes to determine the tax due thereon.
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6. Employees
Employees are interested in the companys profitability and stability. They are after the
ability of the company to pay salaries and provide employee benefits. They may also be
interested in its financial position and performance to assess company expansion
possibilities and career development opportunities.
7. Customers
When there is a long-term involvement or contract between the company and its
customers, the customers become interested in the companys ability to continue its
existence and maintain stability of operations. This need is also heightened in cases
where the customers depend upon the entity.
For example, a distributor (reseller), the customer in this case, is dependent upon the
manufacturing company from which it purchases the items it resells.
8. General Public
Anyone outside the company such as researchers, students, analysts and others are
interested in the financial statements of a company for some valid reason.
Internal and External Users
The users may be classified into internal and external users.
Internal users refer to managers who use accounting information in making decisions
related to the company's operations.
External users, on the other hand, are not involved in the operations of the company but
hold some financial interest. The external users may be classified further into users with
direct financial interest owners, investors, creditors; and users with indirect financial
interest government, employees, customers and the others.

Ways of Obataining Profit

Market
Ensure that you know your market and are technically able in all aspects of the
business.
Product
Ensure that your product knowledge is complete and your service of high quality.
Sales
Ensure that sales are maximised, taking advantage of cost-effective means to increase
sales advertising, recommendations, promotions, leaflets.
Pricing
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Be wary of reducing prices to obtain increased sales or an increase in work. The danger
is that gross profit is reduced and this reduction in gross profit is not matched by an
increase in the gross profit arising as a result of the increased volume of work or sales.
Direct costs
Ensure that your direct costs are kept to an absolute minimum. This may well involve
looking carefully at the rate charged by your suppliers, compared with those from your
competitors.Before changing your supplier, consider the service that you are receiving
and whether or not this will deteriorate if the supplier is changed.The objective of the
above is to expand sales income while controlling and, if possible, reducing direct costs
so as to produce an overall increase in gross profit.
Rates
For all those involved in charging a rate for a job it is important to ensure that your
working time is used effectively. The average self-employed person should endeavour
to charge for 35 hours per week, and as a useful discipline, a timesheet should be kept.
This will assist in identifying the proper utilisation of your time. Research the rates
charged in your industry by your competitors.
Overhead expenses
Ensure that business expenses are maintained at an absolute minimum and that any
additional overheads assumed by the business result in increased profitability and
efficiency. Are you satisfied that for all new overheads you have reviewed the market to
establish where to place your orders? Reliability and backup service are important
factors to take into account.
Where assets are acquired on finance
Be sure that you have obtained quotations for your finance from your supplier, your
bank and a finance company.
Books and records
Having endeavoured to set out a few very basic principles, you must be aware of your
business income and expenditure. The proper keeping of your books and records is
absolutely essential if you are to monitor the overall trends and patterns of income and
expenditure relating to your business activities.
Professional advice
Use your advisors to avoid pitfalls that can cost you dearly.