3002100 Bachelor of Business | Types of Business Structures

Purpose

To demonstrate your ability to:

• undertake independent research
• communicate your understanding of the nature, role, and structure of business and enterprise and apply relevant business ideas and concepts in a practical situation.

Description

Choose an appropriate ownership structure, such as incorporated or unincorporated, sole trader, partnership, cooperative, proprietary or public company, for the following scenario:” Anton is the owner of a small Deli. He is thinking about changing his business structure to another structure. Which two business structures would you advise Anton to operate and why? You are required to analyse and evaluate two particular forms of ownership structure that Anton could consider and make recommendations based on your findings. 

Answer:

Introduction

Businesses, in the contemporary period, have developed considerably, across the globe, both in terms of magnitude as well as in terms of complexities and dynamics in the operational framework of the same. In the contemporary period, various forms of business structures have developed, owing to the variations, complexities, nature and participants in the businesses across the world (Toledo-López et al. 2012). However, not all types of business structures are suitable for all sorts of businesses and it becomes one of the primary responsibilities for the entrepreneurs to choose an appropriate business structure for their ventures, as much of the success, profitability and sustainability of the ventures depend on the suitability of the business structure chosen by them (Dudin et al. 2013). Keeping this into consideration, the concerned report tries to analyse the types of business structures which can be appropriate for a small Deli, owned by Anton.

Types of business struc

In general, in the contemporary period, various business structures can be seen to be existing, differentiated by their characteristics, number of participants, modes of operations, share of profits, decision-making and distributions of revenues, profits and liabilities. The most common forms being as follows:

Sole Proprietorship- This business structure consists of one individual or entity as the sole owner of the entire business and is one of the most common forms of business structures, especially for small businesses, across the globe (Prause 2015).

General Partnership- In this type of business, in general two or more people jointly venture, contribute money, labour, skill or ideas, sharing the profits and losses as per contracts and taking equal liability of the debts of the venture. All these aspects are facilitated by written agreements of partnerships in general.

Limited Partnership- In this form of partnership, there are both general as well as limited partners. While the general partners take responsibility of profits and losses, the limited partners mainly invest and only experiences losses as per their investments (Cavusgil et al. 2014).

Corporation- This type of business structure is highly prevalent for the large businesses and is a more complex one, with more rights and privileges infested to the corporation than the individuals. Tax benefits, financial advantages are usually present along with cons like decrease in personal control and licensing issues.

Company- These businesses are usually run by directors but owned by different shareholders and the directors are usually legally liable for the actions and decisions which they take for the company (Kotey and Sorensen 2014).

Public companies- In this type of companies, shares are traded and securities are issued and offered to public for the purpose of owning and trading. That is, the ownership of this type of companies are dispersed among people in general through shares on stock exchange.

Business structures appropriate for Anton’s small Deli

As discussed above, Anton is the owner of a small Deli and wants to change the business structure of his company to another structure. Although for small businesses, sole proprietorship seems to be one of the primary and most profitable forms of business structures, as the same offers the facilities of higher flexibilities, complete freedoms in decision taking and also tax exemptions for the business venture, however, since Anton wants to change the business structure to some other form, the most appropriate forms of business structures for the concerned venture can be discussed as follows:

General Partnership

Given the fact that the business (Deli) owned by Anton is a small venture, capital constraints and expansion of business as well as aiming towards higher profitability and sustainability can be the primary concerns of the owner. In such scenario, the most appropriate form of business structure which Anton can adopt for his business, can be that of general partnership, with one or two people, who will be eager to take equal responsibilities and monetary initiatives as well as non-monetary liabilities of operating the business (FASO 2016).

Advantages of General Partnership

The primary benefits of entering into a general partnership can be seen to be as follows:

• The presence of more capital as well as more talent pool and skills due to the wholesome involvement of one or two additional partners
  
  
• Increase in the borrowing capacity of the business
  
  
• More effective and efficient decision making due to presence of more than one minds to discuss, design and implement business ideas
  
  
• Sharing of risks and liabilities, which in turn can help in reducing the burden borne by Anton on his own
  
  
• Apart from the personal income taxes of the partners, in general, no other taxes are need to paid by the businesses which run in the general partnership structure, which help in avoiding double taxations (Ciepley 2013)

Drawbacks of general partnership 

The primary drawbacks of this type of business structure can be seen to be as follows:

• High liabilities
  
  
• Threats of disagreements and conflicts of interests among the partners
  
  
• Presence of conflicting personal interests and incentives (FASO 2016)
  
  
• Complicated tax structures and exemption policies

In spite of the presence of several disadvantages and loopholes, this form can be suitable for the small Deli owned by Anton.

Limited Partnership

Anton can also adopt the business structure of limited partnership, in which he can have two general partners and several other limited partners, who can invest in the company to increase its operation, expansion in different places and also for producing more and catering to higher clientele.

Advantages of Limited Partnership

• Scope of having huge number of limited partners
  
  
• Increase in the investment and capital formation for the business, which can be used for higher promotion, more efficient technology, employment of more efficient and skilled staffs and expansion of branches of Deli in different areas
  
  
• Unlimited cap on the acquisition of capital
  
  
• Tax advantages and liability protection, especially for the limited partners (Ragazzo and Fendler 2013)

Drawbacks of Limited Partnership

This business structure, along with its positive sides, also have several adverse implications which are needed to be considered by Anton:

• Risks of less protection
  
  
• Presence of excessive burdens and threats on the general partners as they need to take care of not only their own investments and interests but also of the interests of the other limited partners
  
  
• Extensive periods taken for documentation (Schiff 2012)
  
  
• Legal complexities

However, the positive aspects of limited partnership appear to be stronger for the concerned business and the negative ones can be taken care of if Anton does not involve many limited partners in the beginning and go on increasing the same with the expansion of his small business.

Conclusion

From the above discussion, it becomes evident that in spite of the presence of different types of business structures in the contemporary period, the business structures of general partnership and limited partnership are expected to be the most suitable ones for the small Deli owned by Anton, as the characteristics of these structures are appropriate to raise the business prospects of the same. Keeping this into consideration, it can be recommended that if Anton wants to change the business structure of his small Deli from the current condition, he can either go for a general partnership with not more than two more partners (to avoid complexities but gain the benefits of general partnership) of can also go for limited partnership, with at the most two more general partners and several other limited partners (whose role is limited to investing and reaping their share of profits but not entering into the decision making process). In either of the business structures, Anton can expand his businesses without considerable decrease in the profit shares, decision making power and flexibilities which he enjoys in the current period.

References

Cavusgil, S.T., Knight, G., Riesenberger, J.R., Rammal, H.G. and Rose, E.L., 2014. International business. Pearson Australia.

Ciepley, D., 2013. Beyond public and private: Toward a political theory of the corporation. American Political Science Review, 107(1), pp.139-158.

Dudin, M., Ljasnikov, N., Pankov, S. and Sepiashvili, E., 2013. Innovative foresight as the method for management of strategic sustainable development of the business structures (No. dud2).

FASO, I.B., 2016. Public Private Partnership.

Kotey, B. and Sorensen, A., 2014. Barriers to small business innovation in Australia. Australasian Journal of Regional Studies, The, 20(3), p.405.

Prause, G., 2015. Sustainable business models and structures for Industry 4.0. Journal of Security & Sustainability Issues, 5(2).

Ragazzo, R. and Fendler, F., 2013. Closely Held Business Organizations: Cases, Materials, and Problems.

Schiff, R.L., 2012. Concordance theory, targeted partnership, and counterinsurgency strategy. Armed Forces & Society, 38(2), pp.318-339.

Toledo-López, A., Díaz-Pichardo, R., Jiménez-Castañeda, J.C. and Sánchez-Medina, P.S., 2012. Defining success in subsistence businesses. Journal of Business Research, 65(12), pp.1658-1664.