Business Organizations A business organization is an establishment formed to carry on commercial enterprise.

Objectives State the role sole proprietorships play in our economy. Explain the advantages and disadvantages of a sole proprietorship. Explain the advantages and disadvantages of a partnership. Explain the advantages and disadvantages of incorporation.

The Role of Sole Proprietorships Sole proprietorships are the most common form of business organization. A sole proprietorship is a business owned and managed by a single individual. About 75% of all businesses are sole proprietorships, but most sole proprietorships are small. All together, sole proprietorships generate only about 6 percent of all United States sales. Exp 1

Characteristics of Proprietorships Most sole proprietorships earn modest incomes. Many proprietors run their businesses part-time. Exp 2

Characteristics of Proprietorships

Advantages of Sole Proprietorships With a small amount of paperwork and legal expenses, just about anyone can start a sole proprietorship. Exp 3

Advantages of Sole Proprietorships A proprietorship is the least-regulated form of business organization. Exp 4

Advantages of Sole Proprietorships After paying taxes, the owner of sole proprietorship keeps all the profits. Exp 5

Advantages of Sole Proprietorships Owners of sole proprietorships can run their businesses as they wish. Exp 6

Advantages of Sole Proprietorships Besides paying off legal obligations, such as taxes and debt, no other legal obligations need to be met to stop doing business. Exp 7

Disadvantages of Sole Proprietorships Sole proprietorships have limited access to resources, such as physical capital. Exp 8 Exp 9

Disadvantages of Sole Proprietorships Human capital can also be limited, because no one knows everything. Exp 10

Disadvantages of Sole Proprietorships Sole proprietorships also lack permanence. Whenever an owner closes shop due to illness, retirement, or any other reason, the business ceases to exist. Exp 11

Liability is the legally bound obligation to pay debts. The biggest disadvantage of sole proprietorships is unlimited personal liability. Liability is the legally bound obligation to pay debts. Exp 12

Partnerships Partnerships fall into three categories: General Partnership In a general partnership, partners share equally in both responsibility and liability. Limited Partnership In a limited partnership, only one partner is required to be a general partner, or to have unlimited personal liability for the firm. Limited Liability Partnership A newer type of partnership is the limited liability partnership. In this form, all partners are limited partners.

Advantages of Partnerships Ease of Start-Up Partnerships are easy to establish. There is no required partnership agreement, but it is recommended that partners develop articles of partnership. Exp 13

Advantages of Partnerships Shared Decision Making and Specialization In a successful partnership, each partner brings different strengths and skills to the business. Exp 14

Advantages of Partnerships Larger Pool of Capital Each partner's assets, or money and other valuables, improve the firm's ability to borrow funds for operations or expansion. Exp 15

Advantages of Partnerships Taxation Individual partners are subject to taxes, but the business itself does not have to pay taxes. Exp 16

Disadvantages of Partnerships Unless the partnership is a limited liability partnership, at least one partner has unlimited liability. Exp 17

Disadvantages of Partnerships General partners are bound by each other’s actions. Exp 18

Disadvantages of Partnerships Partnerships also have the potential for conflict. Partners need to ensure that they agree about work habits, goals, management styles, ethics, and general business philosophies. Exp 19

Corporations Incorporating solves many of the disadvantages of sole proprietorships and partnerships but carries with it other disadvantages.

The Definition of a Corporation A corporation is defined as a legal entity created under the authority of the laws of a state, consisting of a person or persons who become shareholders. The corporation’s existence is considered separate and distinct from that of its owners.

Like a real person, a corporation can enter into contracts, sue and be sued, pay taxes separately from its owners, and do the other things necessary to conduct business. Since a corporation is an entity in its own right, it is liable for its own debts and obligations.

Advantages of Forming a Corporation Limited liability. One of the key reasons for forming a corporation is the limited liability protection provided to its owners. Because a corporation is considered a separate legal entity, the shareholders have limited liability for the corporation's debts. The personal assets of shareholders are not at risk for satisfying corporate debts or liabilities.

Advantages of Forming a Corporation Corporate tax treatment. Since a corporation is a separate legal entity, it pays taxes separate and apart from its owners Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends. The corporation pays taxes, at the corporate rate, on any profits.

Advantages of Forming a Corporation Attractive investment. The built-in stock structure of a corporation makes it attractive to investors. Capital incentive. The stock structure also allows corporations to attract key and talented employees by offering them an ownership interest in the form of stock options or stock.

Advantages of Forming a Corporation Operational structure. Corporations have a set management structure. The owners of a corporation are shareholders, who elect a Board of Directors, which then elects the officers. Other than the election of directors, shareholders do not participate in the operations of the corporation.

Corporate Organization The Board of Directors is responsible for managing the corporation. The Board sets corporate policy and the strategy for the corporation, and elects officers — usually a CEO, vice president, treasurer, and secretary — to follow the policies set by the Board, and manage the corporation on a day-to-day basis.

Advantages of Forming a Corporation Unlimited Life. A corporation continues to exist until the shareholders decide to dissolve it or merge with another business. Freely transferable shares. Shares of corporations are freely transferable, because as a separate entity, the existence of a corporation is not dependent upon who the owners or investors are at any one time A corporation continues to exist as a separate entity, and is not terminated or dissolved even when shareholders die or sell their shares.

Disadvantages of Incorporation Fees. It costs money to incorporate. There are four types of fees: a fee to file the Articles of Incorporation with the Secretary of State, a first-year franchise tax Formalities. The proper corporate formalities of organizing and running a corporation must be followed, to receive the benefits of being a corporation.

Disadvantages of Incorporation Paperwork. Paperwork is a huge component of the corporate formalities that must followed. Some of the mandatory paperwork includes: Revenue reports tax returns business bank account records records must be kept of corporate actions, including meetings of shareholders and Board of Directors

Disadvantages of Incorporation Disclosure of names of corporate officers and directors. Many states require that the names and addresses of corporate officers and directors be listed on one or more documents filed with the Secretary of State. Dissolution. Since corporations have a perpetual existence, states provide a mechanism for dissolving a corporation and liquidating its assets. Dissolution is not quick or easy Disolving a corporations means gathering corporate assets, paying creditors and outstanding claims, and distributing the remaining assets to shareholders. Tax consequences. Corporations have potential double-tax consequences — once when the company makes its profit, and a second time when dividends are paid to shareholders.

Corporations As a corporation grows, it may decide to merge, or combine, with another company or companies. Horizontal mergers join two or more firms in the same market. For example, two automakers may decide to form a larger company.

Corporations Vertical mergers join two or more firms involved in different stages of making the same good or service. For example, an automaker may merge with the company that supplies it with rubber tires. Conglomerates combine companies which produce completely unrelated goods or services. Multinational corporations (MNCs) are corporations that operate in more than one country at a time.