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Question 6 of 61 in Basics |
How does the structure of the organization relate to the businesss risk? |
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The type of organization can have a bearing on the degree to which you are personally liable for obligations of the business.
Unincorporated Businesses:
Unincorporated businesses are by far the most common type of business.
The three basic forms of unincorporated business enterprises are
1. Proprietorships (easiest to form and terminate). This is the most common form of business enterprise. Most proprietorships are small. The proprietor faces the greatest risk exposure of any business owner since the business and personal assets of the proprietor are legally indistinguishable – as are business and personal debts. Business misfortune can cause personal financial distress.
2. Partnerships. State laws lay out the legal principles that govern these. Allows for additional input of expertise or capital or time. General partners of businesses also have essentially unlimited exposure.
3. Limited-liability companies. These are the fastest growing form of company. They allow limited liability, flexibility of partnership taxation, and are attractive to people who desire to be limited partners (with limited liability) and supply investment capital, but not become involved in the active management of the company. A variation of this is the registered limited liability partnership which operates as a normal general partnership and offers liability protection for all partners.
Incorporated Businesses:
The corporation is another form of business organization. A corporation exists as a legal entity separate and apart from its owners. It is created under the laws of the various states. Advantages of the corporate form include limited liability, continuity of life, and various tax advantages. Corporations range from small scale to very large. Very large corporations usually have a department that manages the various aspects of risk planning and business and insurance planning. Corporations are taxed as separate taxpayers with rates different from those applicable to individuals. These tax considerations affect some aspects of insurance planning for corporations.
Corporations can be one of two general types (C corporation – the ordinary type, or S Corporation – which has a different type of taxation) |
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