What Are The 4 Types Of Business Structures?

Businesses and entrepreneurship are the key factors to the growth and development of every society. A business is any activity that is consistent in the production of goods and services. It is also that activity that deals with the buying and selling of goods and services for a value.

Entrepreneurship, on the other hand, can be seen as innovation and the creation  of  new business organizations and structures by entrepreneurs through risk-taking.

When we see the United States of America today being one of the richest countries in the world and attracting many foreigners all over the world, Thanks to the works of entrepreneurs, Companies like: Facebook, Twitter, Instagram, YouTube, Google, and others, whose services are used all over the world, are owned by American businessmen.

Also, for more details about what a business is characteristics of a business activity, click on the link below: What Are The Features Of A Business

Looking at the entrepreneurial business structures (organizations), there are four types in which you can venture into; Sole proprietorship, Partnership, and Cooperation.  See a detailed explanation as you read below. 

What Are The Four Types Of Business Structures?

Business structure  is the most important choice you will make regarding your company. The form of business you adopt will affect a multitude of factors, some of which will decide your company's future.

As said earlier, there are three main forms of a business structure that you, as an entrepreneur, can venture into depending on the nature of your business. 

When venturing into a business organization, you need to look at the capital you need and your scope of production. By so doing, it will be easier for you to choose either to get into a one-man's business, a partnership, or  a cooperation 

Also, See: What Are The Sources Of Capital For An Entrepreneur Starting Up A Business?

We have detailed each form below with their advantages and disadvantages.

1. A Sole Proprietorship From of Business

A sole proprietorship form of business organization is one of the most primitive forms and is also commonly referred to as One Man's business.

This is a business where ownership, decision-making, and control are done by a single individual. He provides capital for the business, runs and controls the business alongside the risks involved, and at the end enjoys the profits.

Examples are, Most restaurants, saloons, and stores. 

Merits (advantages) of Sole Proprietorship form of Business

• Requires little capital to start up a sole proprietorship
• All profits made from the business are subject to the owner.
• Owner finds it very easy to reach a conclusion regarding their business as compared to other forms like partnerships, where each member most agrees before implementation.
• Individuals can easily switch to other lines of business (flexibility). This is due to the fact that they operate on a smaller scale.
• It is easier to sell a sole proprietorship form of business to another individual.

This form of business organization can be merited if you choose to produce on a smaller scale.

Demerit (Disadvantages) of Sole Proprietorship Form of business

• In a sole proprietorship form of business, each partner is 100% responsible for the debts and losses in the business.
• The death of the sole proprietor might mean an end to the business structure since he solely controls the entire business unless a family member decides to continue with the business.
• They usually do not enjoy the economics of large-scale production. This is because their objective is not to grow their business but to make profit that can sustain their families and their daily lifestyle.
• It is very difficult to take a loan from financial institutions as a sole proprietor as compared to other forms of business organization.

2. A Partnership form of Business Structure

Just as the name implies, a partnership form of business organization is that in which two or more persons (usually less than 20 persons) come together and agree to put resources together in order to carry out a business venture with the aim of making profit and to grow in the business.

There are two main types of partners in a partnership business structure: a General partner and a Limited Partner. Understanding in detail the different types of partners will guide you regarding the type of partner you can choose to be and also your rights and responsibilities.

Also, See reasons why liquidation (dissolution) can occur in a partnership business.

• General partnership: Here, both partners invest their money, properties, labor, and technical know-how in the business and are 100% liable for any debts or losses in the business. That is to say that even if you invest just a small amount of capital into the business, you are still potentially responsible for all debts. It doesn't require a formal agreement, as it can be verbal or implied between two individuals.
• Limited partnership: Here, a formal agreement is needed between partners. They most also file a certificate of partnership to limit their own liabilities for business debts according to their portion of ownership or investment. They are not 100% liable for the company's debts and losses.

Advantages of Partnership Form of Business organization

• Many shared resources combined provide more capital for the business and make it easier to establish and start up the business.
• Each partner enjoys the total profit of the company, and there is a high possibility to split income.
• It is easy to borrow money from a financial institution.
• There are limited external regulations.

Disadvantages of Partnership Forms of Business Organization

• Partners have unlimited liabilities to the debts of the business. That is, each partner  is liable for their share of the partnership debts as  well as being liable for all the debts.
• It is difficult to reach a conclusion during decision-making due to disagreements and friction amongst partners.
• Each partner is an agent and is liable for actions taken by other partners in a partnership.
• Ending a partnership might be difficult.

3. Cooperation As a Form of  Business organization

A cooperation is a business  structure operating under a legal system, recognized by  law as a legal person, and having the right to sue and be sued in a court of law.

Also see here: What Is Legal Personality

Cooperation is for tax purposes, separate  entities and is considered a legal person.  This means that the profit generated by a cooperation is taxed as the personal income of the company, and then any income distributed to the shareholder as a dividend or profit is taxed again as the personal income of the owners.

Merits of Cooperation as a Form of Business

• Owners have limited liability in case of any losses or debts, and personal properties like cars and houses are not liable to the cooperation. 
• It has the legal ability to sue and even enter into contracts.
• Profits made are shared by owners without double taxation.

Demerits of a Cooperative form of Business

• Ownership is limited by certain state laws.
• Agreement must be comprehensive and complex
• Starting up a cooperation is costly due to its legal requirements.

Conclusively, we say that any form of business organization that you venture will either be subjected to a limited liability to the debts and losses of business or an unlimited liability.

To may like to read this:

1. What Are The Sources Of Capital For An Entrepreneur Starting Up A Business?
   
2. Different Stages (Phases) Involved In A Business Lifecycle
   
3. What Is Entrepreneurship and Who Is An Entrepreneur
   
4. What Are The Different Types Of Bank Accounts?
   
5. What Are The Duties Of A Banker/Customer In A Banker-Customer's Contract?

Being aware of the merits and demerits of every form of business and also having a basic understanding of each will guide you in venturing into any form of business.

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