Business Organizations Chapter 3

FORMS OF BUSINESS ORGANIZATIONS Chapter 3, Section 1

Sole Proprietorship – A business owned and run by one person. – Most numerous and profitable – Smallest in size. Forming a Proprietorship – Easiest to start up – Involves almost no requirements except for occasional business licensees or fees. Example: Lemonade Stand / restaurant

Advantages Ease of starting up Relative ease of management Owner does not have to share profit or success with other owners. Does not have to pay separate business taxes because the business is not a separate entity. Psychological satisfaction. Ease of getting out of business.

Disadvantages Unlimited Liability – The owner is personally and fully responsible for all the losses and debts of the business. Difficulty in raising financial capital. Size and efficiency. – Difficulty in obtaining minimum inventory A stock of finished goods and parts in reserve.

Partnerships Partnership – a business jointly owned by two or more persons. – Shares many of the strengths and weaknesses of a sole proprietorship.

Types of Partnerships General Partnership – Most common form. – All partners are responsible for the management and financial obligations of the business. Limited Partnership – At least one partner is not active in the daily running of the business. – Contributes funds or finances.

Advantages Ease of establishment. Ease of management. Can usually attract financial capital more easily than proprietorships.

Disadvantages Each partner is fully responsible for the acts of the other partners. Limited Partnerships – Limited liability. – The investors responsibility of debt is limited by the size of their investment in the firm.

Corporations Corporation – a form of business organization recognized by law as a separate legal entity having rights of an individual.

Forming a Corporation Charter – a government document that gives permission to create a corporation. Stock – ownership certificates in a corporation. Stockholder – owners of stock in a corporation. Dividend – a check representing a portion of corporate earnings.

Advantages Ease of raising financial capital. – Can sell stock. Can borrow money by issuing bonds. – Bond – a written promise to repay an amount. Can hire professional managers to run the firm Provides limited liability for the owners.

Disadvantages Difficulty and expense of getting a charter. Owners / shareholders have little say in how company is run.