BUSINESS ORGANIZATIONS

SOLE PROPRIETORSHIPS

Characteristics• a business owned and run by one

person• most common form of business

organization in the US• usually the smallest in size of all

types of businesses

SOLE PROPRIETORSHIPS

CHARACTERISTICS

• together only have a fraction of total sales of all businesses

• often the most relatively profitable

SOLE PROPRIETORSHIPS

FORMATION

• easiest type of business to start due to lack of government involvement

• Can start in front yard or on the Internet

SOLE PROPRIETORSHIPS

ADVANTAGES1. The ease with which it can be started

(little Govt. involvement)2. Relative ease in managing and flexibility

-one owner, one decision maker3. Profits do not have to be shared with

any other owners -therefore more money for me

SOLE PROPRIETORSHIPS

4. No business income taxes have to be paid, not considered a separate legal entity

5. Owners feel a certain amount of personal freedom by being their own boss

6. The ease in getting out of business if the owner decides to do so

SOLE PROPRIETORSHIPS

DISADVANTAGES1.    Unlimited Liability – the owner is

personally and fully responsible for all loses and debts of the company

2.    Difficulty in raising financial capital, one person has limited resources

SOLE PROPRIETORSHIP

3.  Size is typically small which does not lend itself to peak efficiency

- this goes back to availability of financial resources

4. The proprietor often has limited managerial experience may be a great inventor but bad business person, also has to deal with sales, marketing, and accounting

SOLE PROPRIETORSHIP

5. Difficulty in attracting qualified employees

a.need employees that can do several things with a smaller company

b.hard to compete with big firms offering better benefits

6. Limited Life – when the owner dies or quits, the entity ceases to exist

PARTNERSHIPS

CHARACTERISTICS• a business jointly owned by two or

more persons• together they represent about 7%

of all business organization in US• again only a small fraction of total

business sales and profit

TYPES OF PARTERNSHIPS

TWO TYPES• general partnership – all the partners

are responsible for the management and financial obligations of the business–most common form of partnership

• limited partnership – at least one partner is not active in the daily running of the business

PARTNERSHIPS

Formation• Also relatively easy to start • Articles of partnership – formal legal

papers – are drawn up to specify the arrangements between the partners:

a. how profits will be split upb. how they can take on future partnersc. what will happen if the partnership ends,

etc.

PARTNERSHIPS STRENGTHS

1.    Ease of establishment

2.    Ease of management – different partners may bring expertise in different areas of running a business – 2 heads are better than 1

3.    No special taxes on a partnership – taxed individually

PARTNERSHIPS (STRENGTHS)

• 4.    Easier to attract financial capital, more resources, easier to get bank loans due to size

• 5.    Larger size of the business makes reaching efficiency easier

• 6.    Many find it easier to attract top talent into their organization

PARTNERSHIPS (WEAKNESSES)

• 1.    In a general partnership, each partner is fully responsible for the actions of the other partners – including losses and debt

• -Limited partnerships have limited liability – the partners liability for the partnerships losses and debts is only as big as their investment in the firm

PARTNERSHIPS (WEAKNESSES)

• 2.    Limited life – when a partner dies, quits or a new partner is added, the original partnership legally ceases to exist – arrangements can be made for the name of the firm to remain the same and such3. Potential conflict between partners – you never know

CORPORATIONS

Characteristics - a form of business organization recognized by law as a separate

legal entity having all the rights of an individual- a very formal and legal arrangement

- about 90% of all business is done by corporations

CORPORATIONS FORMATION

• Must file for permission from the federal or state government

• A charter is granted if permission is given

CORPORATION FORMATION

• -shares of stock (units of ownership) are sold to the investors in the company

• – investors are called shareholders or stockholders

• -the money from the sale of stock is used to set up the corporation

• A person who buys stock in the company becomes part owner and has certain ownership rights – the extent depends on how much they own

TYPES OF STOCK• common stock – basic ownership in a

corporation, with each share of stock representing one vote

• votes are used to elect a board of directors

• board directs the business by setting broad policies and goals and hires the professional management team to manage the company

TYPES OF STOCK

• preferred stock – non-voting ownership in a company

• If company should go out of business:–dividends are received first by those

who own preferred stock – investment in capital and other

resources goes to common stock holders

CORPORATIONS STRENGTHS

• 1.    Ease of raising financial capital• -need more finances sell more stock,

or sell bonds (loans)• 2.    Directors can hire the best

management available to run the firm• 3.    Limited liability for owners – you

only risk the amount of your investment

CORPORATION STRENGTHS

• 4. Unlimited life – if an owner (stockholder) in the company dies or sells his ownership, the firm continues on without him

• 5.    The ease of transferring ownership – just sell your stock to someone else and you are no longer an owner

CORPORATION WEAKNESSES

• 1.    Difficulty and expense in getting a charter (could be thousands of $)

• 2.    Once you vote for a Director, you as a shareholder don’t have much say in the operation of the firm

CORPORATION WEAKNESSES

3. Corporate taxes must be paid (higher than individual tax

rates)

4.      Subject to more government regulation than other forms of

business

Answer the following questions:

a. What problems would you expect to have if you were assigned to do a graded team project with one other student? Would there be more or fewer problems if additional students were assigned to each team? What if you were able to do it alone? Which would you prefer? Explain. How does this compare to advantages and disadvantages of various business organizations? Take 5 minutes to explain your answer.

Answer the following questions:

a. Identify a new product that you as an entrepreneur will create and think will definitely be a hit. Be creative not necessarily realistic! Which type of business organization would you use to create your product and why? Use the advantages and disadvantages discussed in class to defend/rationalize your decision. Minimum 5 sentences.