FORMS OF BUSINESS ORGANIZATION slides.pptx

This document discusses various forms of business organization

1. FORMS OF BUSINESS ORGANIZATION CPA Amasha E. Mwasyete DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 1

2. BUSINESS ORGANIZATION A business organization is an entity formed for the purpose of carrying on a commercial activities. It operates based on systems of law that govern contracts, exchanges of goods and services, property rights, and incorporation. DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 2

3. Factors Influencing the Choice of Business Organization Liability of Owners:  Entrepreneurs often prefer a business form where personal liability is limited to the amount they've invested in the business   Life of Organization: The desired longevity of a business can influence the choice, with some forms offering perpetual existence independent of the owners' DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 3

4. Transferability of Ownership: The ease with which ownership can be transferred can affect the choice, especially if raising funds from the market is a consideration Flexibility: The degree of flexibility in operations and the ability to raise funds can guide the decision on the business form Tax Liability: Different business structures have different tax implications, and entrepreneurs will consider which form offers the most favorable tax conditions DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 4

5. Legal Formalities: The amount and complexity of legal formalities required to establish and operate the business are also important considerations Government Control: The level of government regulation and control can be a deciding factor, with some forms subject to more oversight than others NOTE; No single form of ownership will give you everything you desire. You’ll have to make some trade-offs. Because each option has advantages and disadvantages, your job is to decide which one offers the features that are most important to you DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 5

6. Sole Proprietorship Sole proprietorship is a popular form of business organisation and is the most suitable form for small businesses, especially in their initial years of operation. Sole proprietorship refers to a form of business organisation which is owned, managed and controlled by an individual who is the recipient of all profits and bearer of all risks. This is evident from the term itself. The word “sole” implies “only”, and “proprietor” refers to “owner”. Hence, a sole proprietor is the one who is the only owner of a business. DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 6

7. Sole Proprietorship This form of business is particularly common in areas of personalised services such as beauty parlours , hair saloons and small scale activities like running a retail shop in a locality. Features Single Ownership: The business is owned and operated by one individual, making it the simplest business structure Unlimited Liability: The owner is personally responsible for all debts and liabilities; personal assets may be used to cover business debts DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 7

8. Features Ease of Formation and Closure: There are minimal legal formalities for starting and closing the business, often only requiring a license or certificate specific to the trade Full Control: The owner has complete control over all decisions and operations of the business Sole Beneficiary of Profits: The owner enjoys all profits from the business but also bears all the risks and losses No Separate Legal Entity: Legally, there is no distinction between the owner and the business; the business does not have a separate legal identity Lack of Business Continuity: The business is heavily dependent on the owner, and events like the owner's death or bankruptcy can affect its continuity DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 8

9. Advantages Ease of Formation and Closure: It's the simplest and least expensive business form to establish and dissolve Complete Control: The owner has full control over all decisions and operations Simplified Taxation: Profits are taxed as personal income, which means no corporate tax filings are necessary Fewer Regulations: Generally, there are fewer government regulations and reporting requirements Privacy: Business affairs are kept private, unlike corporations which must disclose financial information All Profits to Owner: The owner receives all the profits from the business DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 9

10. Disadvantages Unlimited Personal Liability: The owner is personally liable for all debts and obligations of the business. This means personal assets are at risk if the business incurs debt or legal issues Difficulty in Raising Capital: Sole proprietors may find it challenging to secure capital investments or loans because they cannot sell stock and lenders may perceive a higher risk Higher Tax Burden: Sole proprietors pay self-employment taxes on all business profits, which can result in a higher tax rate compared to other business structures Sole Responsibility: The owner is solely responsible for all aspects of the business, which can be a significant burden and limit the business's ability to grow Lack of Continuity: The business does not continue if the owner retires, becomes disabled, or dies, which can affect its longevity and sustainability DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 10

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12. Partnership The inherent disadvantage of the sole proprietorship in financing and managing and expanding business paved the way for partnership as a viable option. Partnership serves as an answer to the needs of greater capital investment, varied skills and sharing of risks. Partnership is a form of business organization where two or more individuals manage and operate a business in accordance with the terms and objectives set out in a Partnership Deed The law which governs partnership in Tanzania is Part X of the Law of Contract Act (LCA), Cap 345.  DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 12

13. Features Agreement: It is formed based on an agreement between two or more persons who decide to carry on a business together Profit Sharing: Partners agree to share the profits (and losses) of the business in a predetermined ratio Lawful Business: The business activities carried out must be lawful Unlimited Liability: Each partner has unlimited liability, which means personal assets may be used to cover the business debts if necessary Collective Management: All partners contribute to the management of the business, though the extent of involvement may vary Principal-Agent Relationship: Every partner acts as both a principal and an agent of the firm. As principals, they are responsible for the firm; as agents, they can make decisions binding the firm DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 13

14. Features Non-Transferability of Interest: A partner cannot transfer their interest in the partnership to someone else without the consent of the other partners Voluntary Registration : Partnerships are not required to register, but they may choose to do so for added legal benefits No Separate Legal Existence: Unlike a corporation, a partnership is not a separate legal entity from its owners These features outline the framework within which partnerships operate, balancing shared control with personal responsibility. DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 14

15. Advantages Shared Responsibility: Partners can pool their labor, capital, and expertise, which allows for shared decision-making and division of tasks Diverse Skills and Knowledge: Having partners means access to a wider range of skills and experiences, which can be beneficial in different areas of the business More Financial Resources: Partnerships can lead to increased financial resources as each partner may contribute capital, and the business can benefit from the partners' combined financial strength DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 15

16. Advantages Tax Benefits: Partnerships enjoy pass-through taxation, where profits or losses are reported on the individual partners' tax returns, avoiding double taxation Flexibility: Partnerships generally offer more flexibility in management and operations compared to corporations Work-Life Balance: With shared responsibilities, partners may have better work-life balance, which can lead to increased productivity DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 16

17. Disadvantages Unlimited Liability: Partners are personally liable for the business debts and obligations, which can put their personal assets at risk Limited Resources: Partnerships may have more financial resources than sole proprietorships, but they still face limitations in raising capital compared to corporations Instability: A partnership can be unstable as it may dissolve if a partner decides to leave, passes away, or is unable to continue participating in the business DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 17

18. Disadvantages Non-Transferability of Interest: It can be difficult for a partner to transfer their interest in the business without the consent of the other partners Risk of Disagreements: With multiple partners, there's a higher chance of disagreements, which can lead to disputes and potentially disrupt business operations Management Challenges: Decision-making can become complicated with more partners, especially if there's no clear agreement on roles and responsibilities DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 18

19. Types of Partnership General Partnership (GP): In a general partnership, all partners share unlimited liability for the debts and obligations of the business. They also take part in managing the business and have the authority to make decisions on behalf of the partnership. Limited Partnership (LP): This type involves one or more general partners with unlimited liability, and one or more limited partners whose liability is limited to the amount of their investment. Limited partners typically do not participate in the day-to-day management of the business. DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 19

20. Types of Partnership Limited Liability Partnership (LLP): An LLP combines elements of partnerships and corporations. In an LLP, all partners have limited liabilities, protecting them from the debts of the LLP and from the actions of other partners. LLP is a popular choice for professional service providers, such as lawyers, accountants, and consultants, who want to protect their personal assets while retaining the tax advantages and operational flexibility of a partnership structure. It's important to note that the specific benefits can vary depending on the jurisdiction, so it's advisable to consult with a legal professional to understand how forming an LLP would impact your particular business DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 20

21. Partnership Deed A partnership deed, also known as a partnership agreement, is a legal document that outlines the terms and conditions under which a partnership operates. It's an essential document that governs the rights and responsibilities of the partners, the workings of the partnership, and other important aspects of the business relationship. Here are the typical contents of a partnership deed DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 21

22. Name and Address of the Partnership: The official name and registered address of the partnership. Names and Addresses of Partners : The full names and addresses of each partner. Nature of Business : A description of the primary business activities of the partnership. Date of Commencement: The date on which the partnership begins operations. Duration of Partnership: Whether the partnership is for a specific period or ongoing Capital Contributions : The amount of capital each partner contributes. DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 22

23. Profit and Loss Sharing: The ratio or percentage in which profits and losses are shared among partners. Management and Decision-Making: The roles, responsibilities, and decision-making authority of each partner. Drawings and Salaries: Guidelines for partner withdrawals and any salary or compensation arrangements. Interest on Capital and Loans: The interest payable on capital contributions or loans made by partners to the partnership. DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 23

24. Banking and Financial Management : How banking transactions and financial management will be handled. Books of Accounts and Auditing: The method of maintaining books of accounts and auditing arrangements. Admission of New Partners: Procedures for admitting new partners. Withdrawal/Retirement of Partners: The process for partners wishing to withdraw or retire DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 24

25. Corporation Corporations are a popular form of business organization with distinct features that set them apart from other business structures like sole proprietorships and partnerships. A corporation is a form of business organization that is recognized as a separate legal entity from its owners, who are known as shareholders The shareholders are the owners of the company while the Board of Directors is the chief managing body elected by the shareholders. Usually, the owners exercise an indirect control over the business. The capital of the company is divided into smaller parts called ‘shares’ which can be transferred freely from one shareholder to another person (except in a private company). DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 25

26. Features Legal Entity: A corporation is a legal entity separate from its owners, meaning it has its own legal rights and responsibilities.It can enter contracts, sue and be sued, and own property Limited Liability: Shareholders of a corporation have limited liability, which means they are not personally responsible for the corporation's debts.Their financial risk is limited to their investment in the corporation Perpetual Existence: Corporations have a perpetual existence; they continue to exist even if the shareholders change or pass away DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 26

27. Features Transferability of Shares: Ownership in a corporation is easily transferable through the sale of shares, which does not affect the corporation's operations Ability to Raise Capital: Corporations can raise capital more easily than other forms of business organizations, typically through the sale of stock Double Taxation: Corporations face double taxation, where the company pays taxes on its profits, and shareholders also pay taxes on any dividends they receive DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 27

28. Features Regulation: Corporations are subject to specific regulatory and reporting requirements, including annual reports and other filings with government agencies Management Structure: Corporations are managed by a board of directors elected by the shareholders.The board makes major decisions and oversees management, which handles the day-to-day operations DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 28

29. Advantages Limited Personal Liability: One of the primary advantages of a corporation is the limited liability protection it offers to its shareholders.This means that shareholders are typically not personally responsible for the corporation's debts and liabilities Access to Capital: Corporations have more options to access capital.They can issue stocks and bonds, which can be an effective way to raise funds for expansion and other business opportunities DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 29

30. Advantages Perpetual Existence: Corporations can continue to exist indefinitely, regardless of changes in ownership or management.This can provide stability and longevity to the business Transferability of Ownership: Shares of a corporation can be easily transferred through sale, gift, or inheritance, making it simpler to change ownership without affecting the corporation's operations Credibility: Incorporating can enhance the credibility of a business, which may help in establishing relationships with customers, suppliers, and investors DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 30

31. Advantages Attracting Talent: Corporations can offer stock options or other equity interests as part of compensation packages, which can be attractive to potential employees Structured Management: The corporate structure provides a clear hierarchy and roles, which can be beneficial for organizing management and operations These advantages make the corporate structure a compelling choice for many businesses, especially those looking to expand, attract investment, or limit the personal liability of their owners. However, it's important to consider the specific needs and circumstances of your business, as well as the legal and tax implications of incorporating. Consulting with legal and financial advisors is recommended to make an informed decision. DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 31

32. Disadvantages Double Taxation: One of the main drawbacks of the traditional C corporation is double taxation.The corporation pays taxes on its profits, and when dividends are distributed to shareholders, they are taxed again on their personal income tax returns Cost: Incorporating a business can be more expensive than forming other types of business structures.This includes initial filing fees, and in some cases, higher ongoing fees such as franchise taxes DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 32

33. Disadvantages Complexity: The process of forming a corporation can be more complex and time-consuming than other business structures.It requires compliance with more regulations, maintaining extensive records, and meeting more stringent reporting requirements Regulatory Scrutiny: Corporations are subject to more government oversight, which can include everything from the securities they issue to the way they report income DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 33

34. Disadvantages Inflexibility: The corporate structure is less flexible than other business forms. Making significant changes to the corporation, such as amending the bylaws or articles of incorporation, often requires formal procedures and board approval Management and Ownership Separation: In a corporation, management is typically separate from ownership. Shareholders elect a board of directors who then oversee the corporation's management.This separation can sometimes lead to conflicts of interest between shareholders and management DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 34

35. Disadvantages Delay in decision making : Companies are democratically managed through the Board of Directors which is followed by the top management, middle management and lower level management. Communication as well as approval of various proposals may cause delays not only in taking decisions but also in acting upon them. Conflict in interests: There may be conflict of interest amongst various stakeholders of a company. The employees, for example, may be interested in higher salaries, consumers desire higher quality products at lower prices, and the shareholders want higher returns in the form of dividends and increase in the intrinsic value of their shares. These demands pose problems in managing the company as it often becomes difficult to satisfy such diverse interests. DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 35

36. Disadvantages These disadvantages need to be carefully weighed against the advantages when deciding whether to form a corporation. It's often beneficial to consult with legal and financial advisors to understand how these factors would impact your specific business situation. DR. SALIM AHMED SALIM CENTRE FOR FOREIGN RELATIONS//IRT05210-ENTREPRENEURSHIP 36