Business structure refers to the legal form of a company as in its charter. When you start a business, you have to decide what kind of business entity you will set up.
Three main types of structures are sole proprietorships, partnerships, and corporations. The corporation consists of a public limited company and private limited company.
Sole proprietorship
It is the simplest business structure with only one owner. The owner, for example, you, has full control over operations, decisions, and business success. All profits go to you.
But, you are also fully responsible for business risk and debt. Business debt is your debt. Hence, you have the potential to lose assets to pay off business debt.
Another disadvantage is less capital available because it comes only from you. Business success is very dependent on your expertise and skills.
Partnership
More than two people work together and agree to run a business with joint capital investment and collective responsibility in partnership. Partnership deeds usually specify each partner’s paid-up capital, rights, obligations, and procedures for dissolving the organization, business name, and duration of the partnership.
The partnership structure, in addition to being easily formed, also has more capital available, unlike sole proprietorship. Likewise, the diversity of skills and expertise of each partner contributes to quality decisions and business success. Another advantage is that the risk is spread among partners, even with unlimited liability.
Corporation
A corporation is the most complex than the other two. It must also comply with more tax regulations and requirements.
A corporation is an independent legal entity and separates from its owner.
The owner delegates the management of operations to the board of directors. But, in some cases, the owner is also joined in the management of the company.
The most significant advantage of this structure is that the owner has limited liability. I mean, owners are not liable for company debt. That’s not like the previous two, where owners are fully responsible for business debt.
The second advantage is corporations’ ability to raise significant capital by issuing their shares to the public.
But, corporations bear a double tax burden, namely personal tax and corporate tax. If the owner delegates the company’s operations to the directors, it often creates a conflict of interest. Directors can act and make decisions, not in the interests of the owner.
