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HYBRID FORMS OF BUSINESS ORGANIZATION

Businesses do not always fit into these neat categories. Some are hybrids of the three basic types: proprietorships, partnerships, and corporations.

For example, businesses can be set up as limited partnerships. In this case, partners are classified as general or limited. General partners manage the business and have unlimited personal liability for the business`s debts. Limited partners, however, are liable only for the money they contribute to the business. They can lose everything they put in, but not more. Limited partners usually have a restricted role in management. In many states a firm can also be set up as a limited liability partnership (LLP) or, equivalently, a limited liability company (LLC). These are partnerships in which all partners have limited liability. This form of business organization combines the tax advantage of partnership with the limited liability advantage of incorporation. However, it still does not suit the largest firms, for which widespread share ownership and separation of ownership and management are essential.

Another variation on the theme is the professional corporation (PC), which is commonly used by doctors, lawyers, and accountants. In this case, the business has limited liability, but the professionals can still be sued personally for malpractice, even if the malpractice occurs in their role as employees of the corporation.

To summarize, the corporation is a distinct, permanent legal entity. Its advantages are limited liability and the ease with which ownership and management can be separated. These advantages are especially important for large firms. The disadvantage of corporate organization is double taxation.

1 The United States is unusual in its taxation of corporations. To avoid taxing the same income twice, most other countries give shareholders at least some credit for the taxes that their company has already paid.

2 For example, when Microsoft was initially established as a corporation, its shares were closely held by a small number of employees and backers. Microsoft shares were issued to the public in 1986.

Self-Test 1

Which form of business organization might best suit the following?

a. A consulting firm with several senior consultants and support staff.

b. A house painting company owned and operated by a college student who hires some friends for occasional help.

c. A paper goods company with sales of $100 million and 2,000 employees.