Forms of Business Organization

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Forms of Business Organization

• Chapter 3.1

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I. Sole Proprietorship

• A sole proprietorship is a business run by one
  person. It is the smallest type of business
  organization in size, yet the most numerous and
  profitable(?).

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(I. Sole Proprietorship)

• Advantages
• Ease of start-up.
• Ease of management.
• Owner gets all profits.
• The business itself pays no income taxes.
• Taxes are paid only on the owners personal
  income.
• Psychological satisfaction of owning ones
  business.
• Ease of closing the business.

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(I. Sole Proprietorship)

• Disadvantages
• Owner has unlimited liability.
• Difficult to raise financial capital.
• Hiring enough (quality) personnel.
• Stocking enough inventory to efficiently operate.
• Limited managerial skills (maybe).
• Attractive to (quality) employees.
• Life of the business (ends with death of owner or
  sale of business).

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Discuss this

• Why do you think so many business owners are sole
  proprietors despite the fact that they hold
  unlimited liability?

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II. Partnerships

• A. A partnership is a business jointly owned by
  two or more persons. It is the least numerous
  among business organizations and has the second
  smallest proportion of sales and net income.

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B. Types of Partnerships

• General partnerships are a type of business in
  which all partners are involved in the management
  and finances.
• In a limited partnership, at least one partner is
  not involved in management. This partner may
  have helped to finance the business.

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(II. Partnerships)

• Articles of the partnership document spell out
  how the partners divide up the profits or losses.
• Advantages
• -Ease of start-up.
• -Ease of management.
• -No special taxes on partnerships.
• -Easier to raise capital (bank loans and/or new
  partner).
• -Larger size may aid efficient operations.
• -Easier to attract skilled employees.

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(II. Partnerships)

• Disadvantages
• Partners are responsible for the acts of each and
  every partner (except in a limited partnership
  where limits are expressly written).
• Limited life of partnerships ends if a partner
  leaves.
• Potential for partner conflict.

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Discuss This

• Which type of partnership would you favor
  general or limited?

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III. Corporations

• A corporation is a business organization
  recognized by law as a separate legal entity with
  all the rights of an individual.
• Corporations receive a charter, or government
  permission to create a corporation, which
  included details about stock ownership.

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(III. Corporations)

• Investors who buy common stock or preferred stock
  in a corporation become owners of the firm.
• Advantages
• Ease of raising capital (stocks, bonds).
• Professionals may run the firm instead of owners
  (shareholders).
• Owners have limited liability.
• Unlimited business life.
• Easy to transfer ownership.

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(III. Corporations)

• Disadvantages
• Charters are expensive.
• Ownership and management are separated so
  shareholders have little say in running the
  business.
• Corporate income is taxed twice.
• Subject to government regulation.

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Discuss This

• Who are the real owners of a corporations?

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IV. Government Business Regulation

• Federal and state governments regulate interest
  rates and utility rates.
• State governments may offer industrial
  development bonds to help industries relocate or
  tax credits to draw investments.

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Discuss This

• What are some recent examples of business
  development incentives in your state or community?