Business Structure

What is Business Structure?

Business Structure refers to the type of set up that an investor wants to put in before starting a business and it primary depends on the type of business set up, liability assumed and tax incentives.

Business Structure Types

#1 – Sole Proprietorship

#2 – Partnership

Partnership structure is adopted when there are several investors to the business. There are mainly two types of partnership structures:

1) General Partnership

General Partnership structure there are several owners of the business and each owner is actively taking part in the business. All decision about growth, expansion, and sustainability is being taken collectively by all. So the liability of the business is also shared between all the partners.

2) Limited Partnership

#3 – Corporation

  • The corporation is the most complex business structure. This is how most of the large organizations are formed. The most important feature of a corporation is that the entity and owners are separate. This restricts the claim of creditors to the business itself. So the owner’s personal assets will not be at risk if the business fails.
  • A corporation can issue shares, both common shares, and preferred shares. The corporation doesn’t have a maturity, it is a separate entity and lasts forever. If a shareholder dies, then the shares can be transferred to others.
  • Corporations are really costly to set-up as they are listed in exchanges and require lots of legal works such as the formation of the board, selecting underwriters, and other set-ups.
  • The disclosure requirement incorporation is too high, so the risk of idea leakage is immense.
  • The most important drawback of a corporation is double taxation. Corporate Tax is charged to the organization separately and when dividendsDividendsDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company.read more are being distributed to shareholders, a dividend tax is also charged. So this creates a huge impact on the personal income of the owners.
  • Fundraising is extremely easy for a corporation as there are several sources by which a corporation can raise funds and Institutions gain confidence in financing corporations as they are structurally big and meets legal obligations before setup.
Business Structure

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Features of Business Structure

  • It should be simple so that participants get to know what is happening and the chances of fraud reduce. A simple structure attracts individuals who research companies and plan to invest. So it should be transparent and simple.
  • Ethics should be strong, there should be clear rules circulated within the organization regarding correct procedures to be followed
  • The Hierarchy shouldn’t be too complicated. There should always be a way by which employees can reach the Top Management.
  • There shouldn’t be too much difference in the pay structures of regular employees and higher management.
  • Good care of employees should be taken. A good organization is known for its behavior towards employees.
  • Adaptability is the key. A good business structure should be open to changes. It should be able to adapt to changing environments.

Conclusion

  • Business structures are decided based on the need that is put forward by the owner. Each structure has separate advantages and disadvantages which should be kept in mind before choosing. There is not a single best structure that an owner may choose.
  • When an owner starts alone, then he may start as Sole proprietorship and slowly move to the partnership. There are several businesses running in the world which are registered under different structures and serving different needs.

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