TYPES OF BUSINESS FORMATIONS

There are three basic legal form of business; they include sole proprietorship, partnership and corporation. Each differs significantly and should be evaluated carefully before a decision is made. Other types of business formations are cooperative societies, government enterprises and professional or specialized businesses. As a prospective entrepreneur or business owner each of these types of business formations must be thoroughly studied in line with your short and long term goals.

Sole Proprietorship: In proprietorship, the owner is the individual who starts the business. He or she has full responsibility for all business operations. Legally the owner and the business are one. It is a one man business.

The advantages of sole proprietorship include the following:

  • There is complete privacy in all the affairs of the business.
  • The owners alone share the profits of the business
  • Single taxation, as the owner alone and not the business is taxed.
  • The proprietor makes all the decisions and can act immediately.
  • Just registering for a business name start the business.
  • Personal relationship is maintained among staff and customers.

The disadvantages of sole proprietorship include the following:

  • The liabilities (legal responsibility and accountability) of the business are extended to the personal asset of the owner since the owner and the business are legally one.
  • Death dissolve the business.
  • The owner bears all the risks.

Partnership: This is a form of business owned by a group of two to fifty individuals. In actual sense there is no limitation on the numbers of partners. Examples of partnership with unlimited number of partnership include professional such as accountants, medical doctors and engineers who partner to form a business.

There are limited liability and unlimited liability partnership. In limited liability partnership, the liability (legal responsibility and accountability) of the business is limited to the resources contributed by the different partners that form the business. In an ideal situation at least one of the partners should have an unlimited status.

Unlimited partnership implies that the liabilities of the business are not limited to the resources of the partners, but extend to the personal assets of individual partners.

The advantages of partnership include the following:

  • Division of labour is enhanced and make for greater productivity.
  • Access to much capital than sole proprietor.
  • Continuity of business is guarantee, as death or withdrawer of a partner does not affect continuity.
  • Profits and loses depend on agreement between partners.

The disadvantages of partnership include the following:

  • There must be the need for mutual agreement among partners; hence this can lead to slow business operations.
  • Usually the possibility of conflict of interest or opinion is inevitable.
  • Limited partner have limited control.
  • Unlimited liability exists for all or some members.

Corporations: A corporation is a form of business form and incorporated as a legal entity by a group of people who own the shares of the corporation. In other word, ownership is reflected by ownership of shares of stock. They are sometimes called joint stock companies. Like the Sole Corporation in which the maximum numbers of shareholders is 100, there is no limit as to the number of share holders who may own stock in a corporation.

A corporation can either be a liability company or an unlimited liability company. A limited liability company has liability limited to the shares of the company, which include cash raised from shares paid for by shareholders. The liability is not extended to the personal asset of its members. An unlimited liability company has its liability extended beyond its members to the personal assets of members.

A corporation could either be a private or public company. A private company is a company owned by private owners and in which shareholders do not exceed hundred. Its share cannot be sold to the public and cannot be transfer without the consent of the company. A public company is a company owned by the general or public investors, which could be individuals or organizations. Its shareholder should not be less than seven and has no maximum limit. Its shares can be sold to the public with no restriction on the transfer of ownership. A public company can have limited or unlimited liability.

Generally, shareholders own the company or corporation but need not be involved in running it. Directors are appointed by shareholders and are responsible to the owners and the law for the way the company is run. They can also be employee of the company.

The advantages of corporation include the following:

  • It is a legal entity since it is different from its owner legally.
  • Risks are shared among shareholders of the company.
  • With limited liability for owners, it is more attractive as an investment opportunity.
  • Greater profit and productivity because of the advantage of their size legal status.
  • New capital can be raised as a result of sale of stock or bonds or by borrowing (debt) in the name of the corporation.
  • Greater possibility of growth, expansion, and development.

 The disadvantages of corporation include the following;

  • Require stringent condition for its registration, as it involve legal and regulatory requirement by law.
  • Much capital is needed to set up.
  • Existence of double taxation, as shareholders bears and suffers both corporate and individual loss.
  • Loss of possible control by founders as outsiders can buy controlling interests in companies.
  • A greater percentage of owners are not involved in the management of the company, rather they are interested in the business profit alone.

Cooperative Societies: A cooperative society is form by a group of people coming together with a common objective to enjoy some form of business and profit benefits. Its registration is guided by law and the formation and operations are guided by bye-laws. The bye-law is like a constitution for every cooperative society. Cooperative societies can exist from groups of consumers, producers, professionals, members of organizations and institutions, seeking to pool resources together for a common good of members.

Government Enterprises: Government enterprises are owned by government whether at the local government, state government or federal government. Examples include industries (like cement factory, flour mill, and agricultural production), investment Company, marketing firms and many others.

Professional Business/Specialized Business: These are business own by a group of professional. Example include a group of lawyers or doctors coming together to establish a chamber or hospitals.

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