Business Structure: Ticket to your Journey

Mother essentially plays a major part in the development of a child. It’s easy to understand a child’s behavior with the help of a mother’s nature.

Likewise, understanding business structures will work like your ticket for this bus heading towards the world of finance: FinBus. After all finance is a child of the mother business (of course, favorite one).

Business structures are broadly divided into three categories: Sole proprietorship, Partnership, and Corporation. However, Franchises are also widely accepted as a separate business structure.

Each structure has its own set of advantages and disadvantages with rules and regulations to follow. Understanding of all these is important to know about the credit system as a whole irrespective of whether you are actively working in the finance industry or not.

Sole proprietorship: This type of business is owned and managed by one person. It is operated on the name of the owner or under a trading name.

Example: restaurants, local grocery stores, freelancing, etc.

Advantage:

1. It’s the simplest form of business.

2. Mostly free from regulations and guidelines to follow in case of a partnership.

3. The owner retains 100% of profit after tax deduction.

Disadvantage:

1. The owner is responsible for all the liabilities of the business and in case of a crisis, the owner’s personal properties can also count as recovery by banks.

2. Capital used to run a business is limited to the capacity of the owner to provide it or to borrow it.

3. The owner may not possess the necessary knowledge required to scale up the business.

Partnership: It’s similar to sole-proprietorship, except here two or more people or entities own the business.

The partnership is further divided into three parts:

1. General

2. Limited

3. Limited liability

Let’s understand each one by one:

General partnership: In this type of ownership, all partners manage the business and have unlimited liabilities.

Advantage:

1. Business management can be improved with a specific skill set of partners.

2. Businesses will get more leverage on capital through distributed ownership.

3. Chances of getting credited by bank improve.

Disadvantage:

1. All partners are responsible for all liabilities of business irrespective of their involvement in infusing it.

2. Same as sole proprietorship, each partner is responsible on a personal level to settle liabilities in the case of crisis.

Limited partnership: This type of partnership has two types of partners

1. General partners: who are involved in the management of the business.

2. Limited partners: who’s role is limited to providing capital.

Example: Real estate companies

Advantage:

1. Liabilities are limited to capital contributed by the limited partner.

2. General partners can raise capital without involving investors from outside.

Disadvantage:

1. The structure is more complex to create compared to a general partnership.

2. General partners are personally liable for business debt.

Limited Liability Partnership: Here our partner is not responsible for liabilities infused by other partners.

Advantage:

1. All partners are protected and have limited liability.

Disadvantage:

1. This structure is restricted to certain professions like accountancy, doctors, financial advisory, and lawyers.

Corporation and franchise will be covered in the next blog. So, stay tuned!