Business Organizations Sole Proprietorships, Partnerships, and Corporations

Sole Proprietorship  Def: A business owned and run by one person.  Most common form of business in the U.S.  Sole proprietorships account for 73% of firms in the U.S.  Exp: Lemonade Stand, Lawn mowing business  Def: A business owned and run by one person.  Most common form of business in the U.S.  Sole proprietorships account for 73% of firms in the U.S.  Exp: Lemonade Stand, Lawn mowing business

Advantages  Ease of start-up  Relative ease of management  Keeps profits  No separate business income tax  Psychological satisfaction  Ease of start-up  Relative ease of management  Keeps profits  No separate business income tax  Psychological satisfaction

Disadvantages  Unlimited liability  Difficulty in raising capital  Limited size and efficiency  Limited experience  Difficulty attracting best employees  Limited life  Unlimited liability  Difficulty in raising capital  Limited size and efficiency  Limited experience  Difficulty attracting best employees  Limited life

Partnerships  Def: A business jointly owned by two or more persons.  Make up 7.1% of firms in the U.S.  Exp: Rosati’s, Vitek’s  Def: A business jointly owned by two or more persons.  Make up 7.1% of firms in the U.S.  Exp: Rosati’s, Vitek’s

Types of Partnerships  General  A partnership in which all partners are involved in the daily operations of the business.  Limited  A partnership in which one partner is not involved in the daily running of the business.  Usually a partner that contributed funds to start the business  General  A partnership in which all partners are involved in the daily operations of the business.  Limited  A partnership in which one partner is not involved in the daily running of the business.  Usually a partner that contributed funds to start the business

Advantages  Ease of establishment  Ease of management  Lack of special taxes  Can attract more financial capital easier than sole props.  Larger size=more efficient operations  Easier to attract top talent  Ease of establishment  Ease of management  Lack of special taxes  Can attract more financial capital easier than sole props.  Larger size=more efficient operations  Easier to attract top talent

Disadvantages  In general partnership, each partner has unlimited liability  Limited life  Potential for conflict between partners  In general partnership, each partner has unlimited liability  Limited life  Potential for conflict between partners

Corporations  Def: A business organization chartered by the state.  Created by a charter granted by state/fed govt  Stocks are then sold to investors and the money is used to set up the company.  If the company makes a profit, the shareholders earn a DIVIDEND, a payment of company profits.  Def: A business organization chartered by the state.  Created by a charter granted by state/fed govt  Stocks are then sold to investors and the money is used to set up the company.  If the company makes a profit, the shareholders earn a DIVIDEND, a payment of company profits.

Advantages  Ease of raising financial capital  Directors can hire professional managers  Limited liability for owners  Unlimited life  Ease of transferring ownership (sell stock)  Ease of raising financial capital  Directors can hire professional managers  Limited liability for owners  Unlimited life  Ease of transferring ownership (sell stock)

Disadvantages  Difficulty of getting a charter  Shareholders (owners) have little say in daily operations  Double taxation : corporate tax + shareholder dividends  Subject to more gov’t regulation  Difficulty of getting a charter  Shareholders (owners) have little say in daily operations  Double taxation : corporate tax + shareholder dividends  Subject to more gov’t regulation

Liability  Sole proprietorship- Unlimited liability  Owner is responsible for all losses  Partnership- Unlimited liability  Partners are responsible for all losses  Corporation- Limited liability  Investors can only lose as much as they invested, all other losses are covered by the corporation itself  Sole proprietorship- Unlimited liability  Owner is responsible for all losses  Partnership- Unlimited liability  Partners are responsible for all losses  Corporation- Limited liability  Investors can only lose as much as they invested, all other losses are covered by the corporation itself

Review  Which organization is most common?  Which organization earns most profits?  Who owns the corporation?  What type of liability does the general partner or sole proprietorship have?  What type of liability does the owner of the corporation have?  Which organization is most common?  Which organization earns most profits?  Who owns the corporation?  What type of liability does the general partner or sole proprietorship have?  What type of liability does the owner of the corporation have?