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Types of Firms

A business organization is an entity that is formed for the sole purpose of providing a good or service in exchange for a profit. A business is a product of law governing contracts, property rights and incorporation; all of which contribute to its existence.  A business is typically comprised of a group or unit of people who are all working in tandem towards the common goal of maximizing the profit through commercial endeavors. 

There are several different structure types of businesses.  The two main factors that distinguish each of these structures are the degree to which the owners are held legally liable in the company and the amount of ownership that the owners actually have.

The structures of business organizations are:

  1. Sole Proprietorship: This is typically the first level in the business organizations.  The owner of this company, the sole proprietor, is undistinguishable from their business, meaning that they are not legally separated.  Legal documents to describe the allocation of business profits are not necessary because there is only one owner.  A sole proprietorship is not an ideal situation for business activities that have high risk because the owner is legally attached to the company, so all of their personal assets are also at risk.  A benefit of a sole proprietorship is the ease with which business decisions can be made; there is only one owner who can make a business decision.  In regards to tax claims, the owner will file self-employment income tax.
  2. Limited Liability Company (LLC): This form of business organization provides some personal protection of assets and from liability, however, the owner can still be held legally responsible for some aspects of the business organization.
  3. Corporation: A corporation separates its owners from the business entity, therefore, reducing personal liability for the owners. Corporations are also typically more complicated to run because they usually have shareholders who have invested capital in the company. There are two types of corporations: C corporations (C corps) and S corporations (S corps).  C corps are separate tax-paying entities and any income earned remains within the company, until it is paid as a salary/wage.  This income is also taxed at a lower rate than personal income.  S corps are not responsible for reporting income and losses; this responsibility is passed to the shareholders to report on their personal tax claims.
  4. General partnerships and limited liability partnerships: There is typically more than one owner in these situations. In a general partnership, all owners are personally liable for the company and any partner can make business decisions.  In a limited liability partnership, one partner is legally responsible for the company and can make business decisions, while the other partner(s) are partners merely for the sake of investing.

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