Organizations - Financial Decision Making

Organization

When starting a new business, one of the major decisions that have to be made is what type of ownership structure is going to be implemented (Fay, 1998). The decision to move forward with one type of ownership structure over another depends upon many different factors of the business including the number of owners that are involved, financial position as well as the type of business and market that is being entered. Each and every new business is unique in its investment needs, tax situations “formalities and expenses involved in establishing and maintaining the various business structures” (Fay, 1998), as well the potential liabilities and risks involved, which are all deciding factors in the ownership structure. This paper aims to outline the advantages and disadvantages of the most common ownership structures.

Most small businesses start out as a sole proprietorship. One person or a married couple, who are also responsible for the day-to-day operations of this business, owns this kind of firm. The owner of a sole proprietorship owns all the assets of the business and all profits that are generated through it, also meaning that the owner has complete responsibility for any liabilities, risks and debts associated with the business (Anderson, 2004).

This kind of an organization is the easiest and least costly way of opening up a new business. The costs involved are less than those of a corporation, without fees such as formation fees, annual state fees, filing fees, certain taxes, however, and these sole proprietors do suffer from high insurance costs (Anderson, 2004).

Furthermore, sole proprietorship involves minimal formalities, whereas a corporation is created by filing legal documents with the state, paying fees, and operate within strict guidelines, rules and regulations set out by the state and the country. For companies with a low budget and little risk involved, this may be the best option (Fay, 1998).

An example of a sole proprietorship is the Custom Art By Sophie Zillmann business that is sole owned by one person who is responsible for the operations and profits.

In a business partnership, two or more people share ownership of a single business. There are several types of partnerships, with the most common being general and limited partnerships.

General partnerships are relatively easy and inexpensive to initiate and maintain with each partner assuming equal risk as well as sharing profits and losses evenly unless otherwise states. However, as risk and liability is shared equally among the partners in the business, this means that each owner is responsible for the actions of the others as well as their own (Fay, 1998).

Limited partnerships on the other hand are formed and drawn up by an attorney, as there are greater complexities involved. Therefore fees are higher than sole proprietorships and general partnerships,