Forms of Business Organization in the USA

Basic forms

Sole proprietorship Partnership Corporation

Sole proprietorship - advantages

The simplest way to set up a business – low start-up costs

Less administrative paperwork Owner in direct control of decision making Minimal working capital required All profits to the owner

Disadvantages

Owner fully responsible for all debts and obligations related to his or her business

Creditor would normally have a right against all of his or her assets, business or personal (unlimited liability)

Difficult to raise capital Lack of continuity in business organization in

the absence of the owner

Partnership

A partnership is an agreement in which two or more persons combine their resources with a view to making a profit

A partnership agreement should be drawn up

General partnership

All members share the management of the business

Each member is personally liable for all the debts and obligations of the business

Each partner must assume the consequences of the action of other partner(s)

Limited partnership

Some members are general partners who control and manage the business and may be entitled to a greater share of the profits

Other partners are limited and contribute only capital, take no part in management and are liable for debts to a specified extent only

A legal document, setting out specific requirements, must be drawn up

Partnership - advantages

Ease of formation Low start-up costs Additional sources of investment Broader management base

Partnership - disadvantages

Unlimited liability for general partners Lack of continuity Capital divided authority Possible conflicts between partners

Corporation - definitions

A legal entity that is separate from its owners, shareholders

An artificial person created under law and empowered to achieve a specific purpose

An organization formed with the state governmental approval to act as an artificial person to carry on business (or other activities) for profit

Types of corporations

Private business corporations – the Articles of Corporation

Non-profit corporations (for religious, educational or charitable purposes)

Public corporations (formed by governments for public purposes)

Close corporations (a few shareholders with a working or familial connections permitted to operate informally)

De jure corporations (formally operated under the law); de facto corporations operate as if they were legal, but without the Articles of Incorporation being valid

The Articles of Incorporation

The document that sets out the rules for running the company’s internal affairs

Includes the names of the incorporators (the responsible parties), the amount of stock it will be authorized to issue and its purpose

Determines the rights and obligations of members and directors

Shareholders elect a board of directors

Corporation - advantages

Perpetual life (succession) – continuous existence; a corporation lives on regardless of the change in the structure of shareholders

Limited liability (a corporation’s liability for damages or debts is limited to its assets, so the shareholders protected from personal claims, unless they commit fraud)

Access to capital – easier to raise capital, as a corporation can issue shares of stock to raise funds

Transferability of shares (or of ownership) – shares can be bought, sold, exchanged or given

Professional, specialized management – hired by shareholders to manage the operation

Disadvantages

Closely regulated The most expensive form to organize Extensive record keeping necessary Higher taxation (double taxation of dividens,

larger business tax rates)

Corporations in the USA

Out of all business organization forms, corporations amount only to 20 percent

They do 80 percent of the busines in the country