Answers:
The broad classification of the forms
of business organizations includes:
(i) sole-proprietorship, (ii)
partnership, and (iii) corporate form of business organizations. Partnerships
can be regular and limited; and companies can be private or public. Companies
can also be either for-profit or non-profit organizations.
1 Sole Proprietorship Form of Business
Organization
Formation of sole-proprietorship and
running it has no legal costs. The owner has full control over business and its
management. Since the owner and business are not separate, business income is
considered as personal income and taxed as individual income, avoiding double
taxation. The owner has unlimited liability in business; the owner is
responsible for business liabilities creating risk on personal assets, if the
business fails. Life of a sole-proprietorship business is limited. As sole
proprietorship business is a personal affair of the owner and there are no legal
restrictions, it also has a limited access to funds.
2 Partnership Form of Business
Organization
In terms of advantages and
disadvantages, partnerships are no different from sole-proprietorships, except
that in partnership more than one owner pools resources and shares liability.
Formation is easy too, except that a written agreement, though not required, is
advisable; and it is desirable (though not compulsory) to register the
partnership. Life of partnership becomes further limited because the partnership
breaks with retirement or death of any one partner.
Limited partnership
Through an agreement, one or few
partners can be offered limited liability to the extent of contribution in
capital (or to any amount agreed upon). The condition is, at least one partner
has to have unlimited liability. Usually, limited partners are also ‘sleeping’ or ‘dormant’ partners,
which means they do not take active part in managing the business of
partnership.
3 Corporate Form of Business
Organization
Instead of a partnership, one can form
a company by registering the firm under the Companies Act, 1956. A company is a
legal entity separate from its owners and therefore, the owners are not liable
for the company’s liabilities. Owners enjoy limited liability; limited to the
extent of share capital provided by the member and not more. There is a legal
process to follow and documents to file along with the registration fees for
the registration of a firm as a company. Also, once a company is registered, it
has to comply with several legal requirements from time to time. The owners of
the company are called ‘members’ or ‘shareholders’.
4 Franchising
“Franchising is a continuing
relationship in which a franchisor provides a licensed privilege to the
franchisee to do business and offers assistance in organizing, training,
merchandising, marketing and managing in return for a monetary consideration.
Franchising is a form of business by which the owner (franchisor) of a product,
service or method obtains distribution through affiliated dealers (franchisees).”