Ch21 _Forms_of_Business_Organizationv 2-15-23 (1)
Chapter Overview
Discusses various forms of business organizations, their characteristics, advantages, and disadvantages.
Key Questions about Your Business
Type of business
Creation of the business
Formalities required
Business location
Number of employees involved
Profit distribution methods
Business taxation methods
Types of Business Organizations
Sole Proprietorships
Partnerships
General Partnerships
Limited Partnerships
Corporations
Limited Liability Company (LLC)
Specialized Forms of Business Operations
1. Sole Proprietorships
Creation: Easily created with very few legal formalities.
Control: Owner has full control of management and decisions.
Expansion: Freedom to expand and hire new employees is relatively easy.
Taxation: Direct taxation on the sole proprietor.
Profit retention: Owner retains all profits.
Liability: Personal liability for business debts and risks of tort injuries.
Funding: External funding is typically difficult to obtain.
Limitations: Creation and expansion generally constrained to personal assets.
Interest Transfer: Interest is nontransferable and not legally separate from the owner.
2. Partnerships
Creation: Can be easily formed, either formally or informally, often without a partnership agreement.
Control: Shared control among partners; each partner is an agent for the partnership.
Taxation: Profits and losses flow to partners and can be deducted from personal taxes.
Profit Sharing: Profits are split among partners.
Liability: Personal liability exists for partnership debts and torts.
Funding: Usually difficult to obtain external funding.
Limitations: Generally limited by personal assets; interests may be transferable.
3. General Partnerships
Control: Equal control amongst partners; management responsibilities shared.
Duration: Limited to the life of the partners involved; not a separate legal entity in many states.
Liability: Each partner has unlimited liability for debts.
Taxation: Profits taxed as income for partners.
Transferability: Interests are nontransferable.
4. Limited Partnerships
Control: Management responsibilities shared, but limited partners have restricted roles.
Liability: Limited partners have liability only up to their capital contributions.
Target Group: Often formed by professionals (lawyers, doctors) who can face malpractice suits.
Duration: Limited to the life of general partners; profits taxed as income.
5. Corporations
Ownership: Can have unlimited shareholders; S-Corps max out at 100 owners.
Liability: Stockholders have no personal liability for debts.
Taxation: C-Corps taxed at corporate level; S-Corps taxed to stockholders.
Legal Status: Requires adherence to state laws; not dissolved upon shareholder deaths.
Capital Raising: Can raise capital through bond sales and stock issuance.
Structure: Rigid structure with corporate governance requirements.
6. Limited Liability Companies (LLC)
Tax Advantages: Provides certain income tax advantages similar to partnerships.
Management: Flexibility in management, can be by members or a management member.
Liability: Owners' liability limited to their capital contributions.
Ownership Structure: Distinct from traditional corporations; more flexible termination procedures.
7. Specialized Forms of Business Operations
Cooperatives: Equal voting rights, limited liability for members, encourages pooled resources.
Joint Stock Companies: Investors own shares; used for large financing endeavors.
Business Trusts: Offers limited liability, privacy, but governed by formal documents.
Syndicates: High financial capacity for larger projects, pooled risk.
Joint Ventures: Temporary partnerships for specific projects, personal liability.
Franchises: Business models allowing franchisees to operate under franchisors' trademarks with specific guidelines.
General Principles of Franchises
Not a separate legal entity; requires a legal entity setup.
Franchise agreements detail all aspects of the business relationship.
Types of Franchises
Chain Style Business Operation: Operates under franchisors' brand and standards.
Distributorship: Dealers licensed to sell products within exclusive territories.
Manufacturing Arrangement: Franchisee is equipped with technology to manufacture products.
Types of Business Organizations
Sole Proprietorships
Definition: A business owned and operated by one individual, who is personally responsible for all debts and obligations.
Example: A freelance graphic designer working independently.
Partnerships
Definition: A business structure where two or more individuals manage and operate a business and share its profits and losses.
Example: A law firm co-owned by multiple lawyers.
General Partnerships
Definition: A partnership where all partners share equal responsibility for the management of the business and are personally liable for its debts.
Example: Two doctors who run a clinic together.
Limited Partnerships
Definition: A partnership consisting of at least one general partner with unlimited liability and one or more limited partners whose liability is limited to their investment.
Example: A group of investors forming a real estate investment partnership.
Corporations
Definition: A legal entity that is separate from its owners, offering limited liability to its shareholders and requiring formal incorporation processes.
Example: A multinational technology company like Apple Inc.
Limited Liability Companies (LLC)
Definition: A flexible form of enterprise that blends elements of partnership and corporate structures, offering limited liability to its owners.
Example: A local restaurant owned by a group of individuals as an LLC.
Specialized Forms of Business Operations
Definition: Unique business structures that cater to specific needs or markets, with varying levels of liability and management structures.
Cooperatives
Definition: A business owned and operated by a group of individuals for their mutual benefit, typically focusing on providing goods or services.
Example: A farmers' cooperative that processes and sells members' produce.
Joint Stock Companies
Definition: A business entity where shares of the company can be bought and sold by investors, providing capital for large projects.
Example: A shipping company owned by shareholders.
Business Trusts
Definition: A fiduciary relationship in which a trustee holds and manages property for the benefit of the trust beneficiaries.
Example: A real estate investment trust (REIT) that owns rental properties.
Syndicates
Definition: A temporary partnership for pooled resources aimed at a specific project or goal, often involving large financial commitments.
Example: A group of companies sharing the risk of developing a new product.
Joint Ventures
Definition: A business arrangement where two or more parties agree to pool their resources for a specific goal or project, sharing profits and losses.
Example: Two companies collaborating to develop a new technology product.
Franchises
Definition: A business arrangement where a franchisee operates a business under the trademark and business model of a franchisor, following established guidelines.
Example: A local Subway restaurant operated by a franchisee.
Comparison of Business Organizations
Sole Proprietorships vs. Partnerships: Sole proprietorships are owned by one person, leading to total control but personal liability for debts. Partnerships involve shared management but also shared liability.
General vs. Limited Partnerships: General partnerships share equal management and liability, while limited partnerships limit liability for some partners.
Corporations vs. LLCs: Corporations offer limited liability but are more formal with stricter regulations; LLCs provide flexibility and pass-through taxation.
Sole Proprietorships & Partnerships vs. Corporations & LLCs: The former involve personal liability and simpler tax structures, while the latter protect personal assets and may be more complex in formation.
Comparison of Specialized Forms of Business Operations
Cooperatives vs. Joint Stock Companies: Cooperatives focus on member benefits and shared resources, while joint stock companies concentrate on capital investment and shareholder profits.
Business Trusts vs. Syndicates: Business trusts are long-term, aimed at managing assets, while syndicates are temporary, focused on specific projects.
Joint Ventures vs. Franchises: Joint ventures are partnerships for specific goals and involve shared management, while franchises let independent operators run businesses under a trademark.