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35 Types of Business Organization
It is important that the business owner seriously considers the different forms of business organization—types such as sole proprietorship, partnership, and corporation. Which organizational form is most appropriate can be influenced by tax issues, legal issues, financial concerns, and personal concerns. For the purpose of this overview, basic information is presented to establish a general impression of business organization.
Sole Proprietorship
A Sole Proprietorship consists of one individual doing business. Sole Proprietorships are the most numerous form of business organization in the United States, however they account for little in the way of aggregate business receipts.
Advantages
Ease of formation and dissolution. Establishing a sole proprietorship can be as simple as printing up business cards or hanging a sign announcing the business. Taking work as a contract carpenter or freelance photographer, for example, can establish a sole proprietorship. Likewise, a sole proprietorship is equally easy to dissolve.
Typically, there are low start-up costs and low operational overhead.
Ownership of all profits.
Sole Proprietorships are typically subject to fewer regulations.
No corporate income taxes. Any income realized by a sole proprietorship is declared on the owner's individual income tax return.
Disadvantages
Unlimited liability. Owners who organize their business as a sole proprietorship are personally responsible for the obligations of the business, including actions of any employee representing the business.
Limited life. In most cases, if a business owner dies, the business dies as well.
It may be difficult for an individual to raise capital. It's common for funding to be in the form of personal savings or personal loans.
The most daunting disadvantage of organizing as a sole proprietorship is the aspect of unlimited liability. An advantage of a sole proprietorship is filing taxes as an individual rather than paying corporate tax rates. Some hybrid forms of business organization may be employed to take advantage of limited liability and lower tax rates for those businesses that meet the requirements. These include S Corporations, and Limited Liability Companies (LLC's). Where S-Corps are a Federal Entity, LLC's are regulated by the various states. LLC's give the option for profits from the business to pass through to the owner's individual income tax return.
Partnership
A Partnership consists of two or more individuals in business together. Partnerships may be as small as mom and pop type operations, or as large as some of the big legal or accounting firms that may have dozens of partners. There are different types of partnerships—general partnership, limited partnership, and limited liability partnership—the basic differences stemming around the degree of personal liability and management control.
Advantages
Synergy. There is clear potential for the enhancement of value resulting from two or more individuals combining strengths.
Partnerships are relatively easy to form, however, considerable thought should be put into developing a partnership agreement at the point of formation.
Partnerships may be subject to fewer regulations than corporations.
There is stronger potential of access to greater amounts of capital.
No corporate income taxes. Partnerships declare income by filing a partnership income tax return. Yet the partnership pays no taxes when this partnership tax return is filed. Rather, the individual partners declare their pro-rata share of the net income of the partnership on their individual income tax returns and pay taxes at the individual income tax rate.
Disadvantages
Unlimited liability. General partners are individually responsible for the obligations of the business, creating personal risk.
Limited life. A partnership may end upon the withdrawal or death of a partner.
There is a real possibility of disputes or conflicts between partners which could lead to dissolving the partnership. This scenario enforces the need of a partnership agreement.
As pointed out
36 Market and competitive environment
The competitive environment, also known as the market structure, is the dynamic system in which your business competes. The state of the system as a whole limits the flexibility of your business. World economic conditions, for example, might increase the prices of raw materials, forcing companies that supply your industry to charge more, raising your overhead costs. At the other end of the scale, local events, such as regional labor shortages or natural disasters, also affect the competitive environment.
Direct Competitors
Your direct competitors provide products or services similar to yours. For example, a small computer repair business competes with other local computer repair businesses, as well as large retail stores that offer computer repair services. Small retail shops compete with warehouse clubs and big-box retail stores that use their huge buying power to lower overhead costs, enabling them to offer steep discounts that small stores can’t afford.
Indirect Competitors
In addition to direct competitors, some businesses also face competition from providers of dissimilar products or services. For example, a fine dining restaurant competes with other local restaurants, but it also competes with nearby supermarkets that offer ready-to-eat meals. And a pottery studio that relies heavily on children’s birthday parties must compete with other family-friendly establishments that offer children’s activities, such as roller rinks, theme restaurants and children’s museums.
A competitive environment is where there are several similar firms that are competing for the same market segment. These firms normally produce products of the same nature and form and whose uses are more or less the same. However, because of the competition that exists for the market, these firms are likely to differentiate their products to endear them to a larger number of consumers compared to their rivals.
37 Markets and firms
The theory of the firm consists of a number of economic theories that describe, explain, and predict the nature of the firm, company, or corporation, including its existence, behavior, structure, and relationship to the market
In simplified terms, the theory of the firm aims to answer these questions:
Firms exist as an alternative system to the market-price mechanism when it is more efficient to produce in a non-market environment. For example, in a labor market, it might be very difficult or costly for firms or organizations to engage in production when they have to hire and fire their workers depending on demand/supply conditions. It might also be costly for employees to shift companies every day looking for better alternatives. Similarly, it may be costly for companies to find new suppliers daily. Thus, firms engage in a long-term contract with their employees or a long-term contract with suppliers to minimize the cost or maximize the value of property rights
38.
The Short Run is a time frame in which the quantity of one or more
resources used in production is fixed.For most firms the capital is fixed in the short run. Other resources used by the firm (such as labor, raw materials, and
energy) can be changed in the short run. Short-run decisions are easily reversed.
The marginal product of labor is the change in total product that results from a one-unit increase in the quantity of labor employed, with all other inputs remaining the same.Almost all production processes are like the one shown here and have:
Initially increasing marginal returns When the marginal product of a worker exceeds the marginal product of the previous worker, the marginal product of labor increases and the firm experiences increasing marginal returns. Eventually diminishing marginal Returns When the marginal product of a worker is less than the marginal
product of the previous worker, the marginal product of labor decreases and the firm experiences diminishing marginal returns.
41 Long run
In microeconomics, the long run is the conceptual time period in which there are no fixed factors of production as to changing the output level by changing the capital stock or by entering or leaving an industry. The long run contrasts with the short run, in which some factors are variable and others are fixed, constraining entry or exit from an industry. In macroeconomics, the long run is the period when the general price level, contractual wage rates, and expectations adjust fully to the state of the economy, in contrast to the short run when these variables may not fully adjust.
In the long run, firms change production levels in response to (expected) economic profits or losses, and the land, labor, capital goods and entrepreneurship vary to reach associated long-run average cost. In the simplified case of plant capacity as the only fixed factor, a generic firm can make these changes in the long run:
The long run is associated with the long-run average cost (LRAC) curve in microeconomic models along which a firm would minimize its average cost (cost per unit) for each respective long-run quantity of output. Long-run marginal cost (LRMC) is the added cost of providing an additional unit of service orcommodity from changing capacity level to reach the lowest cost associated with that extra output. LRMC equalling price is efficient as to resource allocation in the long run. The concept of long-run cost is also used in determining whether the long-run expected to induce the firm to remain in the industry or shut down production there. In long-run equilibrium of an industry in which perfect competition prevails, the LRMC = Long run average LRAC at the minimum LRAC and associated output. The shape of the long-run marginal and average costs curves is determined by economies of scale.
The long run is a planning and implementation stage.[2][3] Here a firm may decide that it needs to produce on a larger scale by building a new plant or adding a production line. The firm may decide that new technology should be incorporated into its production process. The firm thus considers all its long-run production options and selects the optimal combination of inputs and technology for its long-run purposes.[4] The optimal combination of inputs is the least-cost combination of inputs for desired level of output when all inputs are variable.[3] Once the decisions are made and implemented and production begins, the firm is operating in the short run with fixed and variable inputs