The Three Forms of Business Organizations

The three forms of a business organization are sole proprietorship, partnership, and corporation.

A sole proprietorship is an unincorporated business that is only owned by one person  (IRS, 2012). They are the most numerous form of business organizations in the United States. Sole proprietorships are very easy to both form and dissolve. Advantages include low start-up costs, low operational overhead, and no corporate income taxes. The sole owner receives all of the profits. These businesses are also subject to fewer regulations, which is an additional perk. Disadvantages include unlimited liability for the sole owner, limited life, and increased difficulty to raise capital (Garrison PhD., 2012). Unlimited liability for the sole owner means that the owner is personally responsible for all actions and debts incurred by the company and any of its employees. Limited life for the company means that when the owner dies, so does the business.

A partnership is an unincorporated business that has more than one owner (IRS, 2012).  A business is defined by the IRS as members who carry on business, trade, financial operations, or ventures and then divide the profits from them. The three different types of partnerships are general, limited, and limited liability partnership. The differences between the three are found in the degree of management control and personal liability. Advantages include the enhancement of value via synergy, ease of formation, greater potential for capital access, and no corporate income taxes. Partnerships, like sole proprietorships, are typically subject to fewer regulations. Disadvantages only slightly differ from those of a sole proprietorship. There is unlimited liability, limited life, and additionally, the possibility of conflicts arising between partners. Conflicts that are unable to be solved typically result in the dissolution of the partnership (Garrison PhD., 2012). Unlimited liability can be avoided with a limited liability partnership. A limited liability company can be owned by one or more members and each member has a limited personal liability for the actions and debts incurred by the company. Advantages of limited liability businesses include management flexibility and pass-through taxation (IRS, 2012).

Corporations are legal entities that do business. They differ from sole proprietorships and partnerships because they are distinct from the members who own the company. The types of corporations include public or private standard, for-profit, charitable, and not-for-profit. Advantages include unlimited commercial life, flexibility in capital raising, ease of ownership transfer, and limited liability. Disadvantages include regulatory restrictions, increased organizational and operational costs, and double taxation.

Financial managers are responsible for looking out for the corporation’s shareholders. The main goal of financial managers is to maximize profits and the main goal of a corporate financial manager is to maximize the current value per share of the existing stock (Ross, Westerfield, & Jordan, 2008). If the corporation’s stock is not publicly traded, the financial managers’ goal is to “maximize the market value of the existing owners’ equity” (Ross, Westerfield, & Jordan, 2008). I believe that the validity of the goal encompasses the essential core values that all financial managers should possess however, the statement could be interpreted the wrong way. If the financial manager is doing something illegal or unethical to increase the current value, he would be failing to make good financial decisions on behalf of the shareholder. A corporate financial manager should focus on making the best financial decision for the shareholder and include its profit potential alongside whether or not it is legal or ethical and how it would reflect on the corporation’s name. There is much more to making sound financial decisions than whether or not it will increase the value of the shares. That is why the main goal of financial managers for corporations in flawed in my opinion.

References

Garrison PhD., S. (2012). Study Finance. Retrieved from Types of Business Organization: http://www.studyfinance.com/lessons/busorg/

IRS. (2012, March 16). Retrieved from Sole Proprietorships: http://www.irs.gov/businesses/small/article/0,,id=98202,00.html

IRS. (2012). Retrieved from Limited Liability Company (LLC): http://www.irs.gov/businesses/small/article/0,,id=98277,00.html

IRS. (2012). Publication 541. Retrieved from Table of Contents: http://www.irs.gov/publications/p541/ar02.html#d0e252

Ross, Westerfield, & Jordan. (2008). Essentials of Corporate Finance. Retrieved from The Goal of Financial Management: http://highered.mcgraw-hill.com/sites/0073405132/student_view0/ebook/chapter1/chbody2/1_4_the_goal_of_financial_management.html