Business Organizations

Business Organization Comparison Sole ProprietorshipGeneral Partnership Limited Partnership Limited Liability Company (LLC) Corporation Formation Duration Liability Management Raising Capital Main Advantages Main Disadvantages Other Notes

Liability Limited- owner’s responsibility for company’s debt limited to size of investment vs. Unlimited- owner fully responsible for all losses & debts of business

Sole Proprietorship Business owned by one person Oldest & most common form of business organization Small = easier & less expensive to manage and operate

Sole Proprietorship Formation- No state permission required Duration- Dependent on sole proprietor Liability- Sole proprietor has unlimited liability Management- Full control of management and operations Raising Capital- Difficult, unless owner contributes own money

Sole Proprietorship Advantages: –Simple and inexpensive to create and operate –Receive all profits! –Decisions made quickly, by proprietor, less complicated –Easier to obtain credit –You did it!!! Successful on your own! WOOHOO!!!

Sole Proprietorship Disadvantages: –Losses not shared –Unlimited liability = personally liable for debts –Make ALL decisions –Lots of responsibility, time consuming & demanding –Money –Whole business dependent on one person

Partnerships 2 or more individuals own and operate business Legally binding agreement –Duties of each partner –Division of profits –Distribution of assets if partnership ends General or Limited

General vs. Limited Partnerships General-each partner has obligations to the partnership, and each assumes unlimited liability for the partnership's debts. Limited-Usually just one general partner. A limited partner doesn’t have obligations to partnership, doesn’t participate in daily operations. ***Role usually nothing more than making an initial capital investment in exchange for a share of the firm's profits.

General Partnership Formation- Agreement between people; no state permission required Duration- Limited Liability- Partners have unlimited liability Management- Usually each partner equal voice Raising Capital- Contribution from partners, may add more partners

General Partnership Advantages: –Simple and inexpensive to create & operate –Efficiency –Easier to get loan (risk shared) Disadvantages: –Partners personally liable for business debts –Decision making slow, more complicated

Limited Partnership ( Partners not equal) Formation- File with state for permission Duration- Limited Liability- General Partners=unlimited liability, Limited Partners=limited liability Management- General Partners usually responsible Raising Capital- Contributions from partners, possible to sell interest in partnership

Limited Partnership Advantages: –Limited personal liability for debts –General partners raise $ without involving outside investors in business management Disadvantages: –More expensive to create than general partnership –General partners take full liability

Corporation Organization owned by many but treated by the law as though it were a person –Own property, pay taxes, make contracts, etc. Most important business organization in U.S. (in terms of business done/$$$)

Proportion of Businesses 74.3% 18.6% 7.1%

Proportion of Total Business Revenue 90.4% %

To Form Corporation 1.Register company with state government -State grants corporate charter=license to operate from that state 2.Sell stock -Common vs. Preferred 3.Elect a Board of Directors -supervises and controls corporation

Corporation Formation- File with state for permission Duration- Permanent Liability- Shareholders not personally liable for debts of business Management- Board of Directors, elected by shareholders Raising Capital- Shares of stock in corporation or sell debt by issuing bonds

Corporation Advantages: –Shareholders make profit ($) with no commitment –Shareholders have limited liability –Decisions/responsibilities divided/shared Disadvantages: –Decision-making slow, complicated –Corporations often taxed twice –Shareholders invest, but have little to no say in how corporation is run

Franchise Contract-franchisor sells right to use name/sell products to another business (franchisee) Franchisee pays fee + portion of profits Think Dunkin Donuts McDonalds or Holiday Inn-advertising –Many fast food restaurants, hotels, gas stations are franchises

Activity What form of business organization is best? Why? Reasons it works for the client. Give 2 or more reasons. 1 Disadvantage to the business organization you choose. How could this be minimized?

Limited Liability Company (LLC) Think Corporations + Partnerships Formation- File with state for permission Duration- Typically limited to fixed amount of time Liability- Members not personally liable for debts of business Management- Operating agreement Raising Capital- Possible to sell interest

LLC Advantages: –Members limited liability for company debts –Members share in operation/management Disadvantage: –More expensive to start up (legal fees)