Chapter 3 Section 1 Forms of Business Organization
Proprietorship/Sole Proprietorship Small, easy-to-manage business that one person owns and runs MOST COMMON KIND OF BUSINESS ADVANTAGES Easy to start Decisions can be made quickly Owner does not share profits with partners Owner pays income taxes, but does not have to pay business income taxes Enjoy being their own boss Easy to get out of the business, if proprietor chooses to
Proprietorship/Sole Proprietorship DISADVANTAGES Unlimited liability- proprietor is solely responsible for all the business’s losses and debts Financial capital-money needed to start-up the business- is sometime hard to raise May result in owner not being able to afford a minimum inventory May not be able to afford to pay enough workers Owner may not have experience in managing a business may have trouble hiring good workers A proprietorship has limited life-business stops when owner dies or leaves the business
Partnership Business owned by two or more people General partnership -all work to manage business Limited partnership -at least one partner does not take part in running the business “silent partner” Legal papers are usually written to describe the responsibilities of the different partners and describe how the profits will be divided
Partnership ADVANTAGES Easy to start Easy to manage-different partners usually have different strengths No special taxes on a partnership May operate more smoothly than a proprietorship-benefit from each other skills Partnerships often find it easier to attract talented workers than proprietorships
Partnerships DISAVANTAGES General partnership- each partner responsible for what the other partners do Limited life Partners may not always agree *** In case of bankruptcy in a limited partnership, a limited partner cannot lose more than initially invested In case of bankruptcy the “unlimited” partners usually have to pay a much larger share of the business’s debts
Corporations Business organization made up of a number of people, but can act as a single person Must have permissions from the government in the form of CHARTER to form a corporation Once the charter has been granted, shares of stock can be sold If you buy stock in a company, you are a stockholder or shareholder Stockholders own the corporation and choose a board of directors to run it They earn dividends or a share of the money earn by the company
Corporations continued There are 2 types of stocks COMMON STOCK-owners elect the board of directors 1 vote for each share owned PREFERRED STOCK-do not get to vote for directors, but if corporation goes out of business these stockholders get the leftover money before owner of common stock
Corporation continued ADVANTAGES Usually easier to get money to run its business Can borrow money by selling bonds The corporation pays interest to the people who buy the bonds and agree to repay the principal that was borrowed at a later date Directors hire professional managers to run the company Shareholders have limited liability-not responsible corps actions or debts Corps continue to function even if owners die or sell their share of stock Easy to transfer ownership because shareholders can sell shares of stock to anyone
Corporations continued DISADVANTAGES Difficult and expensive to get a charter Owner/shareholders have little power to affect the company Profits are taxed twice-once on the corporation itself and again by shareholder when they receive their dividends More government rules for corporations than other forms of businesses
Government and Business Regulations In the beginning many states limited the powers of corporations By late 1800s, state courts had realized the importance of the businesses and relaxed control over them By 20 th century the consumers wanted the states to control corporations They regulated banks, insurance companies, and public works companies—telephone and transportation services Today, states are once again relaxing control in order to promote competition among them