Ways that Businesses are Organized

Organizational Structures

3 Main Types of BusinessSole ProprietorshipPartnershipCorporation

Sole ProprietorshipOne person owns the whole thingAdvantages

If the business succeeds, all the profits are yours

You own everythingVery easy to set up

DisadvantagesIf the business fails, the failure is all yoursPersonally liable

Sole Proprietorship (continued)Disadvantages

Personal assets will be seized in order to recoup debt from lenders

Hard to raise money for expansion since all money invested must come from you

ScenarioSue Jenkins opens a sewing shop. She uses

$2,000 of her own savings to get things started. To legally set her self up as a sole proprietor, she fills out a one page form and sends a check for $35 to the secretary of state.

Sue owns a nice home valued at $250,000. She also owns a couple show horses worth $50,000.

What Happens if Sue Succeeds?

What Happens if Sue Fails?

PartnershipTwo or more people (but usually a small

number) own everythingLiability can be split equally or at a

predetermined percentageAdvantages

If the business succeeds, all profits are split up amongst the partners

The partners own everythingEasy to set up

Partnership (continued)Disadvantages

If t he business fails, all losses are recouped from owners

All financing must come from partnersCan get messy when trying to decide who is

personally liable for what

ScenarioJennifer and Brittani open a bakery. Jennifer

has always loved baking and Brittani has always wanted to run a restaurant business. It is agreed at formation that 20% of the partnership is Jennifer’s responsibility and 80% is Brittani’s.

Jennifer rents a small apartment and has $500 in the bank. Brittani owns several stores in town and inherited a huge farm out in the country.

What Happens if the Partnership Succeed

What Happens if the Partnership Fails

CorporationOne up to millions of people own portions

of the businessEach Portion is Called “Stock”Big decisions are made by votingThe votes of the people with the most stock

counts more than those with less stockProfits are shared whereas people with

more stock (i.e. more pieces of the company) get more profits than those with less stock

Corporations (continued)Advantages

Very easy to raise money since many people will potentially buy stock (i.e. contribute financially) to the company

Zero personal liabilityDisadvantages

Difficult and expensive to setupRequires lawyers, FTC approval, chunk of money,

and time

Corporations (continued)Profits are split up amongst all the

stockholders based on amount of stockNo direct control of the company

Some people may have direct control if they own a lot of stock and are employed by the companyThis is usually not the case

Board of Directors are elected/appointed to run things

No direct ownership of assets

ScenarioA bunch of business people get together and

decide to start a company that plans to sell hats all over the United States. The business people manage to get 5,000 people to purchase 1 million shares at $15 per share

A board of directors is appointed and purchasing of property, plant, and equipment begins. After this initial round of purchasing, employees are hired.

What Happens if the Corporation Succeeds?

What Happens if the Corporation Fails?