Business organization refers to the relationship of a business with the people who own and manage the business.
There are many different types of business organizations that are defined by trade practices as well as under law. All these types of business organizations can be used for all types of businesses including small and big ones. However, there are some types of business organizations used for small businesses only.
The business organizations commonly used in small businesses include the following:
- Sole proprietorship firm
- Partnership firm
- Joint stock Company
A sole proprietorship firm is totally owned by a single person. The limitation of this type or firm are limited availability of funds and managerial expertise for the business. Also firms of this type lack continuity. However these are most easy to start and the owner has complete freedom in maneging the business.
A partnership firm is owned by two or more partners. Depending on the arrangement between the partners it may be run jointly by all or some of the partners. As compared to sole partnership firm it has greater financial and manpower resources, but not as much as a joint stock company. It lacks continuity like proprietorship firm. It is more difficult to form as compared to sole proprietorship firm. The partners may be constrained in the way they run the business by other partners. The biggest disadvantage of partnership firm is the unlimited liability for the total firm. Although, partners are only part owners in the business and its assets, each partner is fully and individually responsible for all its liabilities.
The sole proprietorship and partnership firms are suitable only for very small businesses. As the size of business increase and along with need for finance, and professional management increases, the joint stock company becomes most preferable.
In joint stock companies the ownership and management of the business are separated. The company is owned by shareholder, who are issued shares or stocks in the company. These stocks can be sold, purchased, and transferred like bonds. The shareholder of the company elect a board of director who manage the company. The biggest advantage of the joint stock company is that it is possible to get larger funds for running the business. Further, the liability of each shareholder is limited to the face value of the share. Biggest disadvantage of joint stock company is the difficulty in forming and operating the company to met all the legal and other regulatory requirements imposed by governments to ensure that people in-charge of promoting and managing the do not act against the interests of share holders.