Introduction
The first decision a business owner makes when starting a business is to decide what type of business he or she wants to take on. The choice of business type is very important, as it determines the taxes you will have to pay, the amount of documentation you will need, the degree of personal responsibility you will have, your investment needs, and more. Business formation is regulated by state law. It is the company’s headquarters.
Business organization Definition
A business organization is an organization whose purpose is to carry out commercial operations and satisfy customer needs through the production of goods and services. Most organizations have standards such as social structure, objectives, resource utilization, and rules and regulations.
State law regulates the formation of businesses, and IRS law regulates taxes applicable to businesses. The taxes a company must pay depend on the type of company it owns.
Now, let us understand what these forms of business organization are
Forms of Business Organizations
Although there are many different forms in the business world, the most common forms of business organization are:
Sole Proprietorship
This is a traditional and common form of business organization. It’s easy to set up, and the owner manages the entire company’s operations and is responsible for all financial costs and debts. As long as they are the sole owners, they have the right to do any kind of business.
These business activities include:
- Freelancer Writer
- Shop
- Personal Trainer
- Graphic Designer
Partnership
A partnership is when two or more people come together to form a business. Each individual gives up his share of capital, property, employment, or experience and expects some gain or loss from his share of the business. All partners must declare their share on their tax return, even if it has not been distributed. In a partnership business, partners are not defined as employees, so no taxes are withheld from their distributions.
Corporation
This is the most complex business structure as there are more laws and tax requirements involved. Corporations are formed under the laws of each state and are subject to all corporate taxes. All profits distributed as dividends to shareholders are taxed according to the individual tax rate on the individual’s annual tax return. In this structure, a company is represented as a unit that performs the company’s tasks. Like individuals, corporations are taxed and are liable if they are legally liable. Simply put, if a business is registered as a legal entity, its managers are not personally liable for its debts (although this situation varies by state law).
‘S’ Corporation
An “S” corporation is a variation of a standard corporation. An “S” corporation allows for the transfer of profits or losses on an individual’s tax return.
Limited Liability Company (LLC)
This is a new form of business structure that gained short-term popularity because the owners limit their personal liability for the debts and actions of the LLC. It had similar characteristics to a partnership. Administrative flexibility and tax absorption benefits. The owners of an LLC are called members because they can be numerous companies, other LLCs, or foreign companies.
