1.8 Businesses Organizations

Types of Businesses

 Sole Proprietorship

2. Partnership

3. Corporation

#1. Sole Proprietorship

A business owned and run by one individual with no distinction between the business and the owner.

Most common type of business structure.

Advantages of Sole Proprietorships

1. Quick, easy, and inexpensive to form

2. Complete control

3. Easy tax preparation 

Disadvantages of Sole Proprietorship 

1. Unlimited personal liability

• The owner can be held personally liable for the debts, obligations, and mistakes of the business. 

2. Hard to raise money

• Owner cannot sell stock in the business, which limits investor opportunity. 

• Banks are also hesitant to lend because of a perceived additional risk 

3. Heavy burden. 

• The owner is entirely responsible for the successes and failures of the business.

#2. Partnership

When two or more people to own a business together. 

General Partnership

Partners share equally in both responsibility and liability.

Limited Partnership

Only one partner is required to be a general partner. Other partners (aka: silent partners) contribute money, but have limited personal liability 

LLP – Limited Liability Partnership

Some or all partners have limited liabilities - each partner is not responsible for the other’s misconduct or negligence.

Advantages of Partnerships

Ease of start up

2. Shared decision making and specialization

• Each partners assets (money and other valuables) improve the firm’s ability to borrow funds.

4. Taxation

• Individuals pay taxes, but not the business itself.

Disadvantages of Partnerships

1. Potential for conflict

• Partners may disagree about work habits, goals, management style, or ethics.

2. Partners are bound by each other’s actions

• Each partner is responsible for the actions and decisions of the others.

3. Unlimited liability

• Unless the partnership is a limited liability company, at least one partner has unlimited liability

#3. Corporation

A legal entity owned by individual stockholders

Stocks

represent a portion of ownership in the company.

Why do companies sell ownership of their companies in the form of stocks?

Money

A publicly held corporation

• buys and sells its stock in the stock market (NYSE = New York Stock Exchange)

Initial Public Offerings (IPO)

• when a business “goes public” and first sells part ownership to stockholders.

Who runs a corporation?

Stockholders elect a board of directors who hire and supervise corporate officers (CEOs and CFO)

A downside of who runs the corporations

 Sometimes the CEO doesn’t act in the stockholders best interests.

Solution-Profit sharing (Stock options)

What’s in it for stockholders?

1. Stockholders can sell their stock if it becomes more valuable (“buy low, sell high”)

2. Stockholders get paid dividends (additional money) if the firm earns a profit. 

Advantages of Incorporation

for stockholders

. Limited Liability - Individual investors do not carry responsibility for the corporation’s actions. Stockholders cannot be sued.

2. Shares of stock are transferable, which means that stockholders can sell their stock to others for money

Advantages of Incorporation for the corporations

1. Potential for more growth than other business forms.

2. Can borrow money by selling bonds

3. Can hire the best available labor to create and market the best goods and services possible

4. Have long lives

Disadvantages of Incorporation

1. Difficulty and expensive of start-up

• Corporate charters can be expensive and time consuming.

• A state license known as a certificate of incorporation must be obtained.

2. Double Taxation

• Corporations must pay taxes on their own income and owners must pay taxes on dividends.

3. Loss of control

• Managers and boards of directors, NOT owners, manage corporations.

4. More Regulation

• Corporations face more regulations than other kinds of business organizations.

#4. Multinationals

Large corporations headquartered in one country that have subsidiaries throughout the world. (ex: Wal-Mart, Coca Cola…) 

Multinationals Advantages

1. Consumers benefit because products are offered worldwide.

2. Help spread new technologies and production methods across the globe.

Multinational disadvantages

1. Some feel that multinationals unduly influence culture and politics where they operate.

2. Concern about wages and working conditions provided in foreign countries.