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What is a Business Organization?

The resource of the organization needs to be properly combined to conduct the business successfully. This is because the term Business Organization itself implies all the necessary arrangements required for conducting a business which includes all those steps that need to be undertaken for establishing a relationship between the four M’s i.e. Men, Material, Money, and Machinery in order to earn profits through carrying the activities of business efficiently.

This is called the process of organizing through which all the arrangements are made for grouping the resources and activities in the organization and relationship is developed between them.

The understanding of business organization requires gaining knowledge of various characteristics which help in a better understanding of the organization.

Characteristics of Business Organization

Let’s discuss the characteristics of business organization explained below:

1. Distinct Ownership
2. Separate Status and Management
3. Continuity of Business Operations
4. Lawful Business Activities
5. Business Activities Deals with Goods and Services
6. Risk Involvement

Distinct Ownership

Ownership is the right of an individual or a group to acquire and make the use of legal title of assets or properties for the purpose of running the business. In order to enjoy the gains or profits from such possessions of title to assets or properties and its rational or optimum use, a business firm may be owned by one individual or a group of individuals jointly and control the business

Separate Status and Management

Every business undertaking is considered as having an independent body; has its own assets and liabilities; has its unique way of functioning and is accountable for its outcomes. The profits earned or losses incurred by one firm cannot be accounted for by any other firm.

Continuity of Business Operations

Any business unit having just one single operation or transaction is not a business unit. On a continuous basis, all business enterprises need to engage their resources in specific operations needed for a particular business.

Lawful Business Activities

Every business enterprise must undertake lawful business activities and the business must not involve activities that are illegal in nature.

Business Activities Deals with Goods and Services

Every business undertaking is engaged in the production and/or distribution of goods or services in exchange for money.

Risk Involvement

Risk and uncertainty are attached to business undertakings and are always providing opportunities as well as threats. Future conditions are related to the environment especially the external environment which is unpredictable and uncertain and influences business operations. This makes business decisions risky, thereby increasing the chances of loss arising out of business.

Types of Business Organization

Prospective entrepreneurs need to identify the legal structure that will best suit the demands of the venture before deciding how to organize an operation for the business. For establishing a business the most important task is to select a proper form of organization as the conduct of business, its control, acquisition of capital, the extent of risk, distribution of profit, legal formalities, etc. all depend on the form of organization.

The necessity for choosing a suitable form derives from changing tax laws, the availability of capital or funds, liability situations, and the complexity involved in the formation of a business. The most important types of business organization are as follows:

1. Sole Proprietorship
2. Partnership
3. Company
4. Franchising

Sole Proprietorship

A sole proprietorship is owned by only one person. This is the most common form of business ownership.

Partnership

A business owned by two or more people. The partners share ownership and control of the business.

Company

A company is a business that is considered a separate entity from the owner; even having the legal rights of a person.

Franchising

Franchising is a business arrangement in which the owner of a trademark, trade name, or copyright has licensed others to use it in selling goods or services. It can be a sole proprietorship, partnership, or company form. Each form has its advantages and disadvantages.

The choice of form of business ownership will directly affect how much taxes the owner has to pay and what business licenses and documents are required. In the majority of cases and is perfectly acceptable that small businesses start as one form of ownership and change to another with their growth.

Entrepreneur is not bound by their first choice of form of business. Entrepreneurs can decide to hire help from a lawyer or an attorney who specializes in small businesses and will help an entrepreneur to choose a form of business ownership and ensure him about getting all the required permits and licenses.

Factors for Comparing Forms of Business Ownership

The factors for comparing forms of business ownership:

1. Concept of Limited Liability
2. Burden of Paying Taxes
3. A Possibility of Raising Capital
4. Licenses and Permits

Concept of Limited Liability

The concept of limited liability is an important factor for ensuring that the personal assets or properties of the owner of the business are not at stake to cover the debt or liabilities of the business.

For example in sole proprietorship ownership, a businessman does not have limited liability and if someone sues his/her business their own properties of assets like a car, house, money, etc. are at stake. In a Company ownership form businessmen do have limited liability and his/her personal assets are not at stake.

Burden of Paying Taxes

Some forms of business ownership are taxed more than others as the individual owner is separate from the business organization. To illustrate, a Company form of business organization is subject to double taxation i.e. the business and shareholders pay their tax individually for the same business income.

A Possibility of Raising Capital

For certain business structures, it is not difficult to raise money considering other business structures. For example, in a company form of business organization, the capital can be raised by issuing shares to the public and the required arrangement of money can be made.

However, whenever a company is issuing shares to the public they are selling a portion of ownership to the buyer of shares.

Licenses and Permits

The complexities involved in setting up or initiating a business are different from one form of business organization to another form of business organization. A Company form of business organisation for example needs more paperwork and is more expensive to set up than a sole proprietorship.

FAQs Section About Business Organization