Types of Business Organizations

It is essential to understand the various ways companies can exist in the US and the impact that company structures have on taxes, regulations, liability, and decision-making. In these sections, you will learn the difference between sole proprietors, partnerships and corporations, and how you decide which form is best for your business.

Pros and Cons of a Partnership

The partnership structure has the benefit of simplicity and control but the drawback of personal liability for the partnership's activities.


LEARNING OBJECTIVE

  • Describe the legal pros and cons of a partnership


KEY POINTS

The partnership is a type of business structure open to businesses run and owned by two or more entrepreneurs.

A large advantage of the partnership structure is its ease, in terms of filing and tax treatment. A general partnership can be started with no special formalities. The partners are taxed individually on their share of the partnership's profits.

The structure's main disadvantage is that partnership owners can be personally liable for business losses. The partnership is not a separate entity from the owners/entrepreneurs, unlike a corporation.

Types of partnership beyond the general partnership have developed to mitigate some of the disadvantages of the structure. Limited partnerships and limited liability partnerships are two examples.


TERMS

  • liability
    An obligation, debt, or responsibility owed to someone.

  • partnership
    An association of two or more people to conduct a business,

Business Organization Types

Business organizations can be structured in various ways, in terms of their structures as legal entities and also in terms of the internal structure and management processes. The partnership is one type of business structure. The partnership is the next simplest business structure after the sole proprietorship. Because sole proprietors can only have one owner, the partnership is the simplest structure open to collaborative ownership.


Partnership: Pros and Cons

A large advantage of the partnership structure is its ease in filing and tax treatment. With a general partnership, two or more people can start a business as co-owners with no special formalities, directly controlling the partnership and making binding decisions with a simple majority vote. The partners are taxed individually on their share of the partnership's profits. By default, profits are shared equally among the partners. However, a partnership agreement will almost invariably expressly provide for the manner in which profits and losses are to be shared.

The structure's main disadvantage is similar to the sole proprietorship. Owners can be personally liable for business losses in some forms of partnership, meaning their personal assets are not protected against the claims of creditors. The partnership is not a separate entity from the owners/entrepreneurs, unlike a corporation. This means that the partnership structure is only as good as the partnership at the relational level. If the mutual consent to form a partnership breaks down, the partnership breaks down as well; partnerships are considered to be an aggregate of their partners rather than a separate entity.

There has been debate in most states as to whether a partnership should remain aggregate or be allowed to become a business entity with a separate continuing legal personality. Types of partnership beyond the general partnership have developed to mitigate some of the disadvantages of the structure. Limited partnerships allow limited liability for some partners who have no management authority, and in some cases (depending on the jurisdiction) limited liability partnerships provide for limited liability for all partners.