Businesses come in different forms and types. Your business-related decisions will depend on the structure you want for your business. As business owners, knowing the requirements, advantages, and disadvantages of each of the forms of business and types according to activities can guide you to make the right decision for your start-up.
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If you're planning to start your own business, then perhaps you should first have a vision of what you wish your business to have. For example, the size and nature of your business, number of owners, complexity of decision making, the vulnerability of your business to penalties, liabilities, legal issues, taxes and other government regulations.
“You can't make decisions based on fear and the possibility of what might happen." - Michelle Obama
It is important for entrepreneurs like you to know the different forms and types of business organizations to be able to distinguish and make appropriate actions as far as your start-up is concerned.
Now let's discuss the details of the different forms of business organization.
1. Sole or Single Proprietorship
This form of business organization is the most common and simplest of them all. As you can see from its name, it is called a sole or single proprietorship because it is owned by only one person, which is called the sole proprietor. This form of business must be registered with the Department of Trade and Industry (DTI). Examples of sole or single proprietorship business can be a local bakery, a sari-sari store, a parlor or barbershop, and even an online merchandising shop. However, despite being the most common and simplest form, it also has its own pros and cons.
Advantages
Since this business is owned by one man only, the owner is also the head or the boss of the entity. And as the only owner, you get to keep all the profit to yourself.
Decision-making is also simple as you get to decide by yourself without anyone getting in your way because you have full control over the business.
As it is the simplest form of business organization, there are only few business requirements which makes it the easiest and least expensive form to establish and also to dissolve.
This form of business is subject only to fewer and less complicated government regulations and taxes.
Disadvantages
As the only owner, all the risks of the entity are solely being assumed and shouldered by you.
You only have yourself to rely on when making decisions for the entity.
Financially speaking, you have to raise the capital on your own to finance your business as no one else aside from you is responsible for it.
If the business gets liabilities and obligations, you will also be personally liable for them.
2. Partnership
With two or more people, a partnership business can be established. This form of business is more complex than the sole proprietor, but less than the corporation. In a partnership, those individuals, also called as partners, are the head of the business which means that all of them have respective rights to make decisions for the business and divide the entity's profit among themselves, which is of course subject to what they have agreed on. This form of business must be registered with the Securities and Exchange Commission (SEC). There are different types of partnership, but it all just differ from the degree of liabilities the partners should shoulder and also the control. Below are the advantages and disadvantages of establishing a partnership business.
Advantages
Unlike the sole proprietorship who has only one owner, a partnership can have better decision-making because two or more people get to contribute their ideas, knowledge, expertise, and experience in running the business.
Since there will be two or more people as the owner of the business, all the risks and responsibilities are also divided and shared among them.
This form is easier to establish and dissolve than corporations.
This form may also be subject to fewer and less complicated government regulations than corporations.
More than one individual can contribute to financing the business which means that partnership can have higher capital than sole proprietorships.
Disadvantages
Despite having more people to contribute in decision-making, there may also be a possibility for more conflicts to arise between partners.
Since there will be more than one owner, profits are also divided among everyone.
Partnerships are taxed the same as corporations.
If the business gets liabilities and obligations, all partners will also be personally liable for them.
3. Corporation
Corporations are the most popular and dominant form of business organization. Despite being the most complicated to establish, corporations have the highest percentage of shares that contributes in our economy than the sole proprietorship and partnership. This form can be owned by either just one person or by a group of people. Ownership in this form is represented by what we call shares of stocks and the people who own them are called stockholders or shareholders. Examples of corporation are SM Investments Corp., Ayala Corp., JG Summit Holdings, and many more. Below are the advantages and disadvantages of establishing a corporation.
Advantages
Not everyone who own shares in the company are responsible for the management concerns. Only the members of the board are responsible for managing the company. This is an advantage for the investors who only buy shares of the company but is not obligated to work for them to earn money.
Stockholders or shareholders are not personally liable for the debts and obligations of the company.
Since a corporation is the biggest form of business as compared to a sole proprietorship and partnership, it will have greater capital as well and they can easily raise funds to finance the company, through the issuance of stocks.
This form of business has an unlimited life. Although they have a legal life of 50 years, this can be renewed as many times as they want.
Disadvantages
The extent of your influence in the corporate affairs depends on the amount of shares you own. So the people who own the largest percentage shares in the company are the ones who have more decision making prowess for the company.
This form is the most difficult, most complicated and most costly to establish because there are a lot of requirements and fees needed.
This form is subject to higher taxes and more government regulations.
Profit cannot be easily distributed. There has to be an authorization and a declaration of the board first before profit gets to be distributed among the owners in the form of dividends.
And now that we've discussed about the forms of business organizations, it is now time to identify and distinguish the different types of business according to activities. The three major types of business are the following:
1. Service Business
Services are intangible products being offered by a business to its consumers. This type of business does not require any inventory as they do not provide physical goods, but instead their services come in the type of consultations, professional skills, expertise and any other similar services. Examples of service businesses are schools, parlors or salons, accounting firms, hospitals, banks, hotels, transportation services, entertainment services, and many more.
2. Merchandising (Trading)
This type is commonly known as buy and sell. From its name, this type of business typically just buys merchandise and sells them as it is, meaning without changing its physical form. Compared to service business, this one requires holding inventory for the purchased merchandise. Merchandising business usually earns profit from buying goods at a lower price (wholesale price) and sells them relatively at a higher price (retail price). Example of merchandising business are grocery stores, convenience stores, department stores, online stores, sari-sari stores, and many more.
3. Manufacturing
A manufacturing business is one where raw material is being purchased and then processed into a final product. Organizations who run this type of business usually keep two types of inventory ― one for raw materials and one for the final goods. As compared to the merchandising business, manufacturing changes the physical form of the products before they sell it to the customers. This type of business includes materials, labor and overhead as part of their manufacturing process. An example to illustrate the difference of manufacturing and merchandising will be, when a business buys and sells boxes of milk, they're a merchandising business. But when a business buys milk and use it to make different types of cheese, they're a manufacturing business. Popular companies such as Toyota, San Miguel, Nestle Foods, and many more are all examples of manufacturing businesses.
Now that you know the different forms of business and their types according to activities, you can now distinguish and identify which among these your business belongs to. Knowing these will guide entrepreneurs like you in making decisions for your company. If you're still unsure of what business structure would best fit the company you'd like to establish, we suggest that you consult with professionals.
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