Q: Discuss the types of organizations,
advantages and disadvantages (in bullet forms). Words: 500.
A: The different types of organizations,
advantages, and disadvantages are:
1. Sole Proprietorship:
- This is type of organisation is started and owned by one
person. The owner and management is one and the same.
- Advantages: Easy to start, cheap to start, need not register,
quick decision-making, flexibility.
- Disadvantages: Personal unlimited debt and tax liability of the
owner; sole proprietorship does not enjoy perpetual continuity and
cease upon the death of the owner or closure by the owner.
2. Partnership:
- Ownership is of two or more persons.
- Advantages: Easy to start, better to have a written partnership
agreement to prevent conflicts later, less documentation.
- There are two main types of partnerships - General partnerships
and Limited partnerships.
- General partnerships have unlimited personal debt and tax
liability of the owner partners.
- Limited partnerships have limited personal liability of the
owner partners based on the partnership agreement and the extent of
investment.
- Disadvatages: Unless specified partners have unlimited personal
debt and tax liability; sole proprietorships do not enjoy perpetual
continuity unless specified in the partnership agreement and cease
upon the death of one of the partners or if one of the partners
leaves.
3. Limited Liability Corporation:
- Similar to limited partnerships in nature in terms of limited
personal liability for debt and tax.
- It is a hybrid type of corporation uses the best of
partnerships and corporations.
- Advantages: Can be easy and simple in terms of taxation like a
partnership if partners so wish.
- Disadvantages: Similar to partnerships.
4. C Corporation: Depending on the number of
shareholders, residency of and type of shareholders, a corporation
can elect to be treated for tax purposes to be treated as a
separate taxable entity called a C corporation.
- Advantages: Limited liability of shareholders towards debt and
tax upto the extent of their investment. Shareholders can transfer
ownership by sale or transfer of shares. Perpetual continuity until
dissolved in law. Separation of ownership from management to ensure
professional management are appointed to run the corporation.
- Disadvantages: More difficult and expensive to form and
register, and complex to run; higher tax rates apply. Delays in
decision making due to separation of management and directors from
owners.
5. S Corporation: An S Corp allows its
shareholders to treat profits as distributions and to pass them
through to their personal tax return like a partnership.
- Advantages: Lower tax rates applicable and easier to form than
C Corporations. Separate legal entity to shareholders. Limited debt
and tax liability of shareholders.Shareholders can transfer
ownership by sale or transfer of shares. Perpetual continuity until
dissolved in law. Separation of ownership from management to ensure
professional management are appointed to run the corporation.
- Disadvantages: Shareholders have to file tax returns and pay
taxes from the income they receive from the corporation as the
corporation will not deduct tax. More difficult and expensive to
form and register, and complex to run.