Question

What are the three different forms of business organization? Explain with examples.

Answer 1

The three different forms of business organisations and their examples are as follows:-

Sole proprietorships:-

It is the easiest form of business organisation which can be used by many individual to start his/her business. Sole proprietorship essentially refers to conducting business in your name (though the trade name of the business could differ) such that the proprietor is the only owner of the business, solely bears the risk of the business and enjoys all the profits. Few key features are:

• Unlimited liability of proprietor
• Difficult to raise funds as proprietor only can be an owner in the business
• No need of registration
• Least amount of legal compliance as compared to other firms

For example: Mr. A opens a departmental store as a sole proprietorship, with no separate registration of business and is wholly owned by him

Partnerships:

Partnership is a form of business organisation which is owned by two or more partners. It's similar to proprietorship in terms of simplicity but differs in various other aspects. A partnership is formed through a partnership deed/agreement, and everytime a partner leaves, retires, dies or a new partner enters, the deed must be renegotiated and formed again. Some of the key features are:

• Unlimited liability of each partner towards debts of the partnership firm
• Diversity in management of business with multiple partners bringing their own specialisation
• Limited access to capital as compared to a company but better access as compared to sole proprietorship
• Relatively lesser compliance needs
• Different partners can have different shares in profits, decision making powers, etc

For example: A and B open a cement business in 50:50 partnership by entering into a partnership deed. Both have unlimited liability for the firm's debts

Corporation:

A corporation or corporate is the most complex and sophisticated form of business organisation appropriate to run large businesses. It is registered as a separate legal entity and enjoys identity as a fictitious legal person. It is owned by shareholders who invests funds in the business against issue of shares in the company, and is managed by board of directors appointed by the shareholders. Key features include:

• Difficult to set up and maintain as compliance requirements are maximum in this form
• Limited liability of shareholders towards company's debts
• Unlimited access to capital as shares can be issued to any number of shareholders
• Apt to run large businesses which has large number of owners
• Distributes business profits to shareholders in the form of dividends
• Professional management of business through appointment of capable board of directors

For example: Apple Inc., Microsoft, Amazon Inc are all corporates and are owned by tens of thousands of shareholders if not more.