Once you’ve made up your mind and you’re ready to start your own business, you need to decide on what form of organization your business will take. There are three basic forms of Business Organization; you can choose from Single Proprietorship, Partnership and Corporation. This will determine your capitalization requirements, what accounting method will you use, and the legal guidelines that might affect your company. It’s crucial to pick the type of organization that will be the most advantageous for your business.
1. Single Proprietorship
Well as you might guess it, a Single Proprietorship is a form of organization wherein there is only one individual that bears all the benefits and risks of managing the business. With the lesser cost and minimal licenses and permits needed, Single Proprietorship appeals to a lot of small businesses; it is really the simplest route to start a business. However, a Proprietorship Business is not considered as a separate legal entity. So the owner has a personal liability to the debts of the business. Should the business experience financial problems, its creditors can get compensation from the business owner’s personal assets. The same goes with taxation. In Sole Proprietorship, the tax due will be derived from your income.
2. Partnership
Partnership is a form of Business Organization between two or more individuals who came together in common agreement to share capital, management, profits and risks of a business. Partnership set up and registration is also simple and easy. The only difference is if you choose to have a partnership you and your partners must decide if you want to have a General or Limited Partnership. A General Partnership is when all the Partners has unlimited liability to the business just like to a Single Proprietorship, so a partner can be made liable for another partner’s debts. A Limited Partnership on the other hand is a when there is at least one General Partner who has the greater share of the business and Limited Partners whose liabilities depends only on their share in Capital.
3. Corporation
A Corporation is a form of Business Organizations that declares the business as a separate and legal entity managed by its shareholders. Legal existence allows the business the right to enter in trade and in contract; just like a normal human being. This business setup also upholds the Corporation to be liable for any obligation or debts it occurs. So creditors can only exhaust the resources of the business and never from the shareholders, should financial burdens arise. A Corporation seems to be the best of all the above options because, unlike Proprietorship and Partnership, it has the ability to generate a bigger capital through shares of stock and it features a Limited Liability scenario. But it is the most tedious and costly to set up. Not to mention, corporations are taxed twice. First when it generates profit and second when dividends are given to its shareholders.
The three forms of Business Organization provides different Advantages and Disadvantages. As a business owner, you have to assess and see where you can be most comfortable and what option should be the most advantageous for you, that you can bear the negative implications that it will give you.
I hope you learned a thing or two after reading this write-up. If you think you want to further sharpen your accounting knowledge, TrendStatic Business Solutions can offer you technical training services with a course name “Accounting for Non-Accountants”. Inquire today! So you can learn more from the bests in the industry.
TrendStatic Corporation is also an Accounting Training Provider located in Ortigas Centre, Pasig Philippines.
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