Business Structure
Business is defined as an entity or organization that engages in commercial, industrial, and/or service activities for the benefit of others. Businesses may be either for-profit or non-profitable organizations that perform primarily to meet a charitable purpose or further a socially responsible cause. Examples of socially responsible businesses may include schools, hospitals, advocacy groups, environmental groups, charities, government agencies, or corporations that contribute to the local, state, or national economy. Business activities may also be conducted for other purposes such as buying and selling, building and reconstructing homes, promoting goodwill, and recruiting employees and volunteers.
A corporation is a separate legal entity from its owners. This structure provides protection and financial security to the shareholders, partners, and lenders. It insures against the risk of directors and officers of the corporation committing fraud and bankruptcy crimes. However, unlike a sole proprietorship, no one person owns or controls the business. Instead, it is controlled by the corporation’s shareholders who are usually the individuals who started the business in the first place through initial investment or profits.
Businesses are classified into two major categories: limited liability partnerships (LLPs) and corporations. An LLP is composed of one or more businesses, while a corporation is made up of one or more entities rather than a single entity. There are many differences between these two structures, but they are often used in strategic management planning, business valuation, business plan structuring, and other business decisions.
Limited liability partnerships (LLPs) allow investors to share in the profits of the business rather than owning a majority stake. Unlike a corporation, there are no restrictions on how the profits are invested and the profits of the LLC company are only tax-efficiently if the company itself does not make any profits. Limited liability partnerships also allow passive ownership of stock in the partnership, which means that the shares are owned by the partnership and not by the shareholders of the corporation. All these advantages come at a cost, however. The profits of the partnership are limited to what the shareholders of the corporation can invest.
A corporation is a legal entity and its main goal is to use its assets and property for the benefit of the shareholders or members of the corporation. It does not have any share capital, so any profits made cannot be used as capital for debt repayment. Another advantage of the corporation is that the shareholders of a corporation enjoy a leveraged position in their investments; that is, a greater interest rate. This interest rate is called the corporation’s “intrinsic value”. Unfortunately, it also means that the corporation may lose its asset or property in case of certain events like bankruptcy, liquidation, foreclosure or disposal. While the shareholder’s equity does not contribute to any of the corporation’s profits, it does protect the shareholder’s asset and protects his or her liability.
Business partnerships refer to different types of relationships between individuals and organizations. Partnerships are considered legal entities in contrast to a partnership. In both a partnership and a corporation, profits and losses are taxed according to the profit or loss determined by the shareholders. However, partnerships may be taxed based on the extent of the partnership’s involvement in the business. This means that a business formed partly or wholly out of the owner’s hobby could be taxed as a business, even if it only employs one employee. A good example of a partnership would be an ownership interest in a resort.
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