A business owner’s first decision while starting a business is to decide what form of business he wants to venture. To choose the business type is essential because it will determine how much tax needs to be paid, the quantity of paperwork, individual liability, and how much to invest etc. The business formation is regulated by the state law where the company is established.
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Business organization Definition
A business organization is an establishment intended to carry commercial business by producing goods or services and meet the customers’ needs. Most of the organizations have a standard such as social structure, purpose goals, utilization of resources, rules and regulations, etc.
The state law regulates the establishment of the business and IRS law controls the tax incurred for business. So, how much tax business should pay depends on what form of business one owns.
Lets us now understand what are these forms of business organization
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Forms of Business Organisations
There are many forms in the business world but the most common forms of business organization are.
- Sole Proprietorship – This is the traditional and popular form of business organization. Its formation is simple and the owner controls the complete operations of a business and is liable for all financial burdens and debts. A long as they are the only owner, they have the right to operate any category of business. These businesses operations include.
- Shop or retail business
- Home-based company
- Individual consulting firm
- Partnership – In partnership, two or more individuals come together to start a business. Each individual gives their share of capital, property, employment or experience, and expects some profits or losses from the business share. All the partners must report their percentage of share on the tax return even if it’s not distributed. In a partnership business, partners are not defined as employees, so taxes are not retained from any distributions.
- Corporation – It is the most complicated business structures because it adds more laws and tax claims. Corporations are established under the laws of each state and are subjected to all the corporate income tax. All the profits issued to shareholders as dividends are taxed as per the individual tax rates on their private annual tax returns. Under this structure, the corporation is displayed as an entity that manages the duties of a business. Similar to a person, the corporation is taxed and held responsible if the company is liable for any legal action. In simple words, if a business is registered under a corporation, then the owner is not personally responsible for its debts (however, this situation differs according to the state law).
- ‘S’ Corporation – The ‘S’ Corporation is a variety of a standard corporation. The ‘S’ corporation authorize profit or losses to be transferred to individual tax returns.
- Limited Liability Company (LLC) – This is a new form of business structure and gained its popularity in the short-term because the owner has limited individual liability for the debts and actions of the LLC. It had similar features like a partnership such as administration flexibility and the advantage of passing the taxation. The proprietor of LLC is known as members as they can include many, corporations, additional LLC and foreign entities.
The above mentioned is the concept, that is elucidated in detail about ‘Forms of Business Organisations’ for the Commerce students. To know more, stay tuned to BYJU’S.