Business Organizations Sole Proprietorships, Partnerships, and Corporations Fortune 500

Business Organizations In the U.S., many important decisions are made by economic institutions-persons and organizations that use or represent the factors of production. One of the major economic institutions is the: Business Organization is a profit-seeking enterprise that serves as the main link between scarce resources and consumer satisfaction.

Business Organizations There are three main forms of business organizations: sole proprietorships, partnerships, and corporations.

I. Sole Proprietorships

Sole Proprietorships A Sole Proprietorship is a business owned and run by one person. This is the most common but smallest sized business. Sole proprietorships today account for about 72% of all businesses but only 5% of all business sales.

Sole Proprietorships Strengths 1. Ease in which it can be started. (Run out of home, mow lawns, lemonade stand.) 2. Ease of management. (Decisions made quickly by the owner.) 3. Keep all profits. (There may be losses, but there may be profits.)

Sole Proprietorships Strengths 4. Does not pay business income tax. (Owner pays personal income tax on profits.) 5. Be your own boss. (Psychological, personal satisfaction.) 6. Ease of getting out. (Simply stop offering goods and services.)

Sole Proprietorships Weaknesses 1. Unlimited liability (Owner is personally and fully responsible for all loses and debts of the business.) 2. Difficult in raising financial capital. (It takes a lot of money to start a business, banks are hesitant to lend.) 3. Not big enough to operate efficiently. (Need enough capital to pay for labor and inventory.)

Sole Proprietorships Weaknesses 4. Limited managerial experience. (Owner may have to hire others to do sales, marketing, or accounting.) 5. Do not offer fringe benefits to employees. (No paid vacation, sick leave, retirement, health insurance.) 6. Limited life. (If the owner dies, quits, or sells, the firm ceases to exist.)

II. Partnerships

Partnerships A partnership is a business owned by two or more persons. This shares many of the same strengths and weaknesses as a sole proprietorship. Partnerships represent about 8% or all businesses and 9% of all business sales in the U.S.

Partnerships Types of Partnerships 1. General Partnership-all partners are responsible for the management and financial obligations. 2. Limited Partnership-at least one partner is not active in running the business.

Partnerships Forming a Partnership Articles of partnership are legal papers drawn up to specify arrangements between partners. These papers state ahead of time how profits or losses are divided. Limited liability means investor only responsible for the size of his or her investment. It may also state the way future partners can be taken into the business and the way the property of the business will be distributed if the partnership ends.

Partnerships Strengths 1. Ease of establishment. 2. Ease of management (Each partner has his or her strength.) 3. Lack of taxes 4. Easier to acquire financial capital. (Better chance of a bank loan.) 5. Larger size makes it more efficient. 6. More easily attracts top talent because they can offer more fringe benefits.

Partnerships Weaknesses 1. Fully responsible for other partners. (One partner can cause a firm to suffer huge losses.) 2. Limited life (If one partner ceases to exist, it must go through a legal change.) 3. Potential conflict between owners.

III. Corporations

Corporations A corporation is a form of business organization recognized by law as a separate legal entity having all the rights of an individual. Corporations can buy and sell property, enter into contracts, and can sue or be sued. Corporations make up 20% of all businesses and 87% of all business sales.

Forming a Corporation Incorporate – to form a corporation Business must ask the state or national government permission. If approved, a charter is granted. The charter states the company name, address, purpose of business, and other features.

Forming a Corporation A charter specifies the number of shares of stock, ownership parts of a firm. These are sold to investors called stockholders or shareholders. The money is then used to set up the corporation. If a corporation is profitable, it may issue a dividend, a check representing a portion of profits, to each stockholder.

Corporate Structure After an investor purchases stock, he or she becomes an owner and has certain ownership rights. The rights of ownership depends on the type of stock. 1. Common Stock- usually receives one vote for each share of stock owned. The vote is used to elect a board of directors, who direct the corporation’s business. 2. Preferred Stock-nonvoting owners who are the first to receive dividends.

Corporate Structure

Corporations Strengths 1. Ease of raising financial capital. May issue bonds, money given to a Corporation as a loan. They mature at a certain date with a set amount of interest. 2. Hire the best talent available. 3. Limited liability. (The corporation, not the owners are responsible for its debts and obligations.)

Corporations Strengths 4. Unlimited life. (Business exists even when ownership changes.) 5. Ease of transferring ownership. (Simply sell the stock.)

Corporations Weaknesses 1. Difficult and expensive to gain a charter. (Attorney fees, filing expenses; can range from a few hundred to several thousand dollars.) 2. Owners have little say in running business. 3. Expensive taxes on profits. 4. Subject to more government regulation.