Forms of Business Organizations

Essential Question Why do American’s start their own businesses? Desire for Independence Desire for Money Desire for Prestige General Interest in Product Desire to satisfy a consumer need ???

Capitalism What “elements” of American Capitalism allow for people to start their own businesses? Freedom of Enterprise Private Property Weak Barriers of Entry into the Market Profit Incentives

Types of American Businesses Sole Proprietorships Partnerships Corporations

Maximum Gain v. Maximum Loss

Sole Proprietorship Run by one person who benefits from all the profits but also has unlimited liability should the business fail. Easiest type of business to begin Requires few licenses and fees Easiest type to locate (internet, warehouse, home, etc.)

SP: Advantages & Disadvantages Advantages 1. Easiest to start up 2. Simple Management- immediate decision making 3. No sharing of profits 4. Owner does not pay separate business taxes 5. You are your “Own Boss” 6. Easy exit of market- pay bills and your FREE! Disadvantages 1. Unlimited Liability- personal possessions at risk 2. Difficult to raise financial capital- banks hesitant…individual must use savings, credit, etc. 3. Limited on size and efficiency 4. Limited management experience 5. Difficulty in attracting qualified personnel. 6. Limited Life

Limited Gain v. Limited Loss

Partnerships Unincorporated business owned and operated by two or more people who share the profits and the responsibility for debt. General Partnership: All partners are equally responsible for management and debts Limited Partnership: One or more partners are not active in the daily running of the business and have limited responsibility for debts

P: Advantages & Disadvantages Advantages: 1. Easy start-up 2. Ease of Management- partners specialize 3. Lack of special taxes 4. Better at attracting financial capital 5. Larger size = better efficiency 6. Easier to attract top talent Disadvantages: 1. GP- partners responsible for acts of others LP- LP only loses investment 1. Limited Life 2. Divided Profits 3. Conflict between partners?

Possible Max/Min Profits v. No Liability

Corporations Business organization recognized by law as a separate legal entity They can buy and sell property, enter into legal contracts, and sue and be sued (rights of individuals but separate from owners)

Corporate Formation Formal and legal arrangement 1. File for permission w/ national government 2. Upon approval a charter is granted 3. Specified amount of stock granted 4. Stocks sold to investors/shareholders 5. $ from stock sales go towards “set up” of corporation 6. Once business profits, dividends are issued to stockholders

Corporate Structure Stockholders = Owners Common Stock: basic ownership of corporation (1 stock = 1 vote) Preferred Stock: nonvoting membership…can’t elect board members, but receive dividends BEFORE common stock holders. **Should corporation go out of business…PS holders receive return of investment before CS holders**

C: Advantages & Disadvantages Advantages 1. Easy to raise financial capital (issuing of bonds) 2. Limited Liability 3. Owners can hire managers to run firm 4. Unlimited Life 5. Ease of ownership transfer (sell stock) Disadvantages 1. Double taxation = detailed sales & expense records 2. Expense of getting a charter 3. Shareholders do not dictate how business is run 4. Federal Government Regulation