How Businesses Are Organized Chapter 20 Lesson 1 How Businesses Are Organized

Sole Proprietors A sole proprietorship also called simply proprietorship – is a business owned by one person. Most businesses in this form are small businesses. Dry Cleaners, auto repair shops, beauty shops, and local restaurants often take this form. Sole proprietors are their own bosses. They make decisions without having to consult, or check with, other owners. Sole proprietorships have some disadvantages, too. The owner may find it difficult to raise financial capitol. This is money needed to run a business or expand it. The owner might also have to buy equipment and supplies. Second, Sole proprietors have no limits on their liability or legal responsibility, for the business. Third, sole proprietors may have trouble hiring skilled workers.

Partnerships Partnership – a business that two or more people own and operate together. In some cases a single owner cannot raise enough money to expand the business. The owner may seek a partner with the money or skills that the business needs to grow.

How Partnerships Are Structured A partnership is created when two or more people sign a legal agreement called articles of partnership. This document states what roles each partner will play in the business. It clarifies, or explains, how each partner will share in the profit or loss of the business. Two kinds of partnerships can be formed. The most common form is called the general partnership. All partners own a share of the business and are all responsible for some of its management and debts. The second type is called limited partnership. Limited partners own a share of the business, they have no direct involvement in the running or management of the company. Limited partnerships are also called Limited liability partnerships. They are liable for only the amount of money they invested in the business. The initials LLP after a business`s name show it is a limited liability.

How Partnerships Are Structured Cont. Partnerships can be any size. Some can be as small as two partners, with no employees. In some fields, such as medicine or law, a small firm of four or five partners may be just the right size for the market it serves. In some companies there may be hundreds of partners providing services in many different locations across the United States.

Advantages of Partnerships The biggest advantage over sole proprietorships is that they can raise more money. A partnership has more than one owner, so it usually has more capital to work with than a sole proprietorship does. It is also easier for a partnership to borrow money from a bank. Another advantage of partnerships is that each partner brings special talents to the business.

Disadvantages of Partnerships The main drawback of a general partnership is the same as the sole proprietorship. Each partner has unlimited liability. He or she is fully responsible for all the debts of the business. The business could be sued, and if there is not enough money to cover the debt or damages, you would have to pay 100% out of pocket.

Corporations The third form of business is the corporation. A corporation is a business that is owned by a group of people and operates under a license. You can tell a business is a corporation if the abbreviation Inc. follows the company`s name. A corporation is legally recognized by state governments as a body that is separate from the people who own it. Under law a corporation has the rights and responsibilities that an individual has.

The Corporate Structure The state where the corporation is formed grants the company a charter. This document gives the group of people permission to form a corporation. People invest in the corporation by buying shares of ownership. Those shares are represented by documents called stocks. Those who own shares are called shareholders or stockholders. The charter of the corporation states exactly how much stock the corporation can sell. The charter requires a corp. to hold a meeting of stockholders every year. At this meeting stockholders elect a board of directors to represent them. The board of directors meets during the year to make major decisions about the corporation. It also hires a president and other managers to run the company on a daily basis. Stockholders are not involved in the day to day operations.

The Corporations Advantages The biggest advantage is the ease of raising capital . It can raise huge amounts of money by selling stock. It can also borrow money by selling bonds, which are certificates of agreement between the borrower and a lender. The ease of raising money is one reason that the corporation is the most common form of business for large companies. Some corporations are huge. The yearly earnings of these corporations are larger than the economies of most of the world`s countries. Another advantage if that the ownership can easily be transferred. As a result the corporation can have a long life. The third advantage of the corporation is limited liability. The corporation is responsible for the debts not the owners.

The Corporations Disadvantages The government regulated them more than any other form of business. By law, corporations must make their financial records public. They must also hold an annual stockholders` meeting at least once a year. Major corporations have millions of stockholders.

Other Forms of Businesses One type of business that has become very common in recent years is the franchise. A franchise is a business in which the owner is the only seller of a certain product in a certain area. The owner pays a fee to the supplier for that right. The owner also gives that supplier a share of the profits. Fast-food restaurants and hotels that are nationally known chains are often franchises. The franchise owner benefits because there I no competition from another nearby seller of the same product. The supplier also helps the franchise owner run the business. The biggest disadvantage is that the franchise owner does not have complete control over the business. There is another form of business called a nonprofit organization. These organizations provide goods and services without trying to make a profit. Cooperatives are another form of nonprofit organization. This is a business group formed by people who want to carry out an economic activity that benefits all of its members.

Other Forms of Businesses Cont. There are different kinds of cooperatives. A consumer cooperative buys goods in large amounts. Members then get those goods at low prices. Service cooperatives provide members with services such as insurance or loans. Producer cooperatives help members sell their products.