There are several ways that a business can be organized to define its structure. The main types of business organizations in the United States are sole proprietorship, corporations, partnerships and limited-liability companies. How a business is organized will determine how it pays taxes, accounts for profit and manages the liability of its owners.
The term "business organization" refers to how a business is structured. The business organization is defined in the bylaws when the business is formed with the name and contact information of those who own and run the company with their roles defined. The bylaws state the purpose of the organization and what it does. A sole proprietorship does not have bylaws because one person owns and controls the business.
A sole proprietorship is a business organization owned by one individual who controls all aspects of the organization. The organization uses a flow-through tax structure with the owner's social security number to pay taxes instead of having to pay corporate taxes and individual taxes. Advantages of a sole proprietorship include simplicity of bookkeeping and relatively low start-up costs compared to other businesses. Among disadvantages is that all liability falls on the sole proprietor, potentially impacting personal assets, in the event of a lawsuit. While this type of organization is less expensive to start, it is more difficult to raise capital.
A partnership is an organization where two or more individuals utilize their money, talent and labor to build a company. All partners personally share in the profit and loss of the company. Taxes are paid by the individuals. Partners are liable in the event of a lawsuit. When a partner dies, the partnership ends.
A corporation is a business organization that has shareholders and a board of directors that govern how the organization will be run. The shareholders are the owners. A corporation will continue to exist even after a shareholder dies. Corporations have their own tax identification number and file their own taxes. Owners are taxed on dividends paid on corporate profits and salaries paid by the corporation. Owners are not held personally liable. Corporations have the ability to raise large amounts of capital by becoming a publicly traded security. To do so requires board approval, with the corporation meeting specific financial requirements outlined by the Securities and Exchange Commission.
A limited-liability company combines features of a corporation and a partnership where owners are called members rather than shareholders or partners. There are several advantages to creating a limited-liability organization such as limiting the liability for legal judgments and debt to the assets of the organization. Personal assets are protected like a corporation but taxes are treated like a partnership where the individual members are responsible. Among negative aspects is that the organization requires more complex financial maintenance and has a limited life. When one member dies, the limited-liability company ceases.
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