The Main Article in This Series – Types of Business Organization
The word business literally means “action of earning a profit.” The concept of business can be used to describe any type of institution undertaking undertaken to earn revenue from the activity or to create wealth. In its broadest sense, business can refer to any kind of business activity in which profit is realized through production, exchange, or management of resources. The word business literally refers to an entity organized for the purpose of earning a profit. Business can also mean the term partnership, franchise, or association.
For the purposes of our discussion, business can be broken down into several types: sole proprietorship, partnership, corporation, business organization, and LLC (limited liability company). Each of these categories is referred to as a level of activity on the scale of business activity. For example, sole proprietorship is generally understood to mean and conduct by an individual sole proprietor. However, in the context of business administration, one would more likely to think of the more general term partnership. A partnership can take many different forms, such as a partnership involving two or more companies, and a partnership involving numerous individuals. Similarly, a corporation may be solo or joint operation, with the leading priority of business ownership held by the corporations and the other stakeholders being stockholders.
A. One way to differentiate between different types of businesses is to understand their level of activity. As noted above, there are several classifications, but there are three basic categories. The more highly developed and differentiated of these three types are described below.
Larger businesses comprise some of the most successful, profitable, and fastest growing businesses in the world. These businesses are typically characterized by a structure composed of a corporation or limited liability company. Examples include privately held partnerships, venture capital funds, and large publicly traded corporations. Private and public research facilities, investment banks, human resources, marketing, accounting, technical, product development, manufacturing, distribution, and financing all fall under this category.
The second type of business structure is a corporation. A corporation is formed by a majority of the shareholders as a separate legal entity from the owners. Unlike a partnership, there is no requirement that a third party be involved in the purchase, sale, or transfer of ownership. Corporations have the advantages of providing a separation of financial resources, managing the risk of loss, having limited interaction with third parties, and being able to pass control of the business to another party. On the downside, corporations are susceptible to state and local taxation and may be subject to lawsuits by stockholders.
Another way of categorizing business entities is through the creation of limited liability partnerships (LLPs). An LLP is an entity that has many similar characteristics to a corporation, but does not provide complete independence from its owners. Rather than owning the business outright, LLCs are formed by two or more unrelated individuals who agree on a percentage of the ownership. There are many countries in which creating an LLP is illegal, as it provides only partial ownership of a company.
The last main type of company is the partnership. A partnership is created by a number of unrelated individuals who own shares in a business or other entity. Partnerships are often seen as a good option for small businesses that do not require the use of stock, as they do not have the risks associated with debt and are not publicly traded. However, in many countries, partnerships are treated as a form of unincorporated business, and this makes them difficult to incorporate. The IRS even has a list of strategies it uses to discourage partnerships from becoming publicly traded corporations, and can effectively shut down an LLP if the partnership is trading in its debt in order to protect its assets.
These four main types of business entity are not the only ways in which a business can be organized. For instance, sole proprietorships and corporations can be organized to create either a partnership or a limited liability partnership. Limited liability partnerships (LLPs) and S corporations both allow the same types of liability sharing, but limit their liability to their owners and partners. Creating a new type of business structure can be a daunting task, and the services of a qualified accountant can make the process go much smoother.