Professional Documents
Culture Documents
organization
S.gobi
BAD/2013/199
GROUP ii
1231
Content
Types Of Business Organization
Sole Proprietorship
i) Introduction
ii) Characteristics
iii)
Advantages
iv)
Disadvantages
Partnership
v) Introduction
vi)
Characteristics
vii) Advantages
viii) Disadvantages
Company/ Corporate
ix)
Introduction
x) Characteristics
xi)
Advantages
xii) Disadvantages
What Is Agency Problem?
How It Is Arise In Corporation?
How It Is Manage a Corporation?
Sole Proprietorship
A sole proprietorship is a simple type of business structure that is owned and operated by the same
person.
Sole proprietorships allow persons to report business income and expenses on their individual tax
returns.
Tax benefits: The owner of a sole proprietorship is not required to file a separate business tax report.
Instead, they will list business information and figures within their individual tax return. This can save
additional costs on accounting and tax filing. The business will be taxed at the rates applied to personal
income, not corporate tax rates.
Employment: Sole proprietorships can hire employees. This can lead to many of the benefits
associated with JOB creation, such as tax breaks. Also, spouses of the business owner can be employed
without having to be formally declared as an employee. Married couples can also start a sole
proprietorship, though liability can only assumed by one individual.
Decision making: Control over all business decisions remains in the hands of the owner. The owner
can also fully transfer the sole proprietorship at any time as they deem necessary.
Taxes: While there are many tax benefits to sole proprietorships, a main drawback is that the owner
must pay self-employment taxes. Also, some tax benefits may not be deductible, such as health
insurance premiums for employees
Lack of continuity: The business does not continue if the owner becomes deceased or
incapacitated, since they are treated as one and the same. Upon the owners death, the business is
liquidated and becomes part of the owners personal estate, to be distributed to beneficiaries
Difficulty in raising capital: Since the initial funds are usually provided by the owner, it can be
difficult to generate capital. Sole proprietorships do not issue stocks or other moneygeneratinginvestments like corporations do.
PARTN
A partnership is an agreement between two or more people to finance and operate a business .
Partnerships, unlike sole proprietorships, are entities legally separate from the partners themselves. In a
general partnership, however, profits and losses flow through to the partners tax returns .
Characteristic of Partnership
Limited life
The life of a partnership may be established as a certain number of years by the agreement. If no such agreement is made, the
death, inability to carry out specific responsibilities, bankruptcy, or the desire of a partner to withdraw automatically terminates
the partnership.
Mutual agency
In a partnership, the partners are agents for the partnership. As such, one partner may legally bind the partnership to a
contract or agreement that appears to be in line with the partnership's operations.
Unlimited liability
Partners may be called on to use their personal assets to satisfy partnership debts when the partnership cannot
meet its obligations. If one partner does not have sufficient assets to meet his/her share of the partnership's debt,
the other partners can be held individually liable by the creditor requiring payment.
Ease of formation
Other than registration of the business, a partnership has few requirements to be formed.
Transfer of ownership
Although it is relatively easy to dissolve a partnership, the transfer of ownership, whether to a new or existing
partner, requires approval of the remaining partners
Number of partners
The informality of decision making in a partnership tends to work well with a small number of partners. Having a large number of
partners, particularly if all are involved in operating the business, can make decisions much more difficult.
Relative Lack of regulation
Most governmental regulations and reporting requirements are written for corporations. Although the number of sole proprietors
and partnerships exceeds the number of corporations, the level of sales and profits generated by corporations are much greater
In most partnerships, the partners are involved in operating the business. Their regular involvement makes critical
decisions easier as formal meetings are not required to get approval before action can be taken.
Partnership
Advantages
Partnerships provide moral support and will allow for more creative brainstorming.
Partnership Disadvantages
Business partners are jointly and individually liable for the actions of the other partners.
Profits must be shared with others. You have to decide on how you value each others time and skills
Since decisions are shared, disagreements can occur. A partnership is for the long term, and expectations
and situations can change, which can lead to dramatic and traumatic split ups.
The partnership may have a limited life; it may end upon the withdrawal or death of a partner
A partnership usually has limitations that keep it from becoming a large business.
You have to consult your partner and negotiate more as you cannot make decisions by yourself. You
therefore need to be more flexible
A major disadvantage of a partnership is unlimited liability. General partners are liable without limit for
all debts contracted and errors made by the partnership.
CORPORA
TION /
A legal entity that is separate and distinct from its owners. Corporations enjoy most of the rights and
responsibilities that an individual possesses; that is, a corporation has the right to enter into contracts,
loan and borrow MONEY , sue and be sued, hire employees, own assets and pay taxes.
Characteristics of a company
Separate legal existence:
A company has a distinct legal entity independent of its members. It can own property, make contracts
and file suits in its own name. Shareholders are not the joint owners of the company's property.
Perpetual succession:
Perpetual succession means continued existence. A company is a creation of the law and only the law
can bring an end to its existence. Its life does not depend on the life of its members .
Limited liability:
As a company has a separate legal entity, its members cannot be held liable for the debts of the company.
The liability of every member is limited to the nominal value of the shares bought by him or to the
amount of guarantee given by him.
Transferability of shares:
The capital of a company is divided into parts. Each part is called a share. These shares are generally
transferable.
Separation of ownership and control:
Members have no right to participate directly in the day-to-day management of a company. They elect
their representatives, called directors, who manage the company's affairs on behalf of the members.
Voluntary association:
A joint stock company is a voluntary association of certain persons formed to carry out a particular
purpose in common. Members of a company can join it and leave it at their own free will.
Corporate finance:
The share capital of a company is generally divided into a large number of shares of small value. These
shares are purchased by a large number of people from different walks of life.
Artificial legal person:
A company is an artificial person created by law. It exists only in contemplation of law. It is competent to
enter into contracts and to own property in its own name.
Statutory regulation and control:
Government exercises control through company law over the management of joint stock companies. A
company is required to comply with several legal formalities and to file several documents with the
Registrar of Companies.
Advantages of a Corporation
Generally, a corporation's shareholders are not liable for any debts incurred or judgments handed down
against the corporation. Shareholders only risk their equity in the corporation.
Corporations may be able raise additional funds by selling shares in the corporation.
Corporations may deduct the cost of benefits it provides to employees and officers.
Some corporations may be able to elect treatment as an S corporation, which exempts them from federal
income tax other than tax on certain capital gains and passive income.
Disadvantages of Corporation
Forming a corporation requires more time and MONEY than forming other business structures.
What is
Agency
A conflict of interest inherent in any relationship where one party is expected to act in another's best
interests. The problem is that the agent who is supposed to make the decisions that would best serve the
principal is naturally motivated by self-interest, and the agent's own best interests may differ from the
principal's best interests. The agency problem is also known as the "principalagent problem."
The agency problem is also known as the "principle agent" problem. The idea is that the principle
(owner) wants to maximize her/his own wealth. Meanwhile, the manager wants to maximize his own
wealth, which may involve hiring his alcoholic brother in law, and using his sister in law's boyfriend's
company as a supplier, from which he gets a spiff for every load that he buys. So the manager is
maximizing his self-interest, but the owner is getting sub-standard returns on her/his capital.