1. Types of Business Organization
Mr. Rosenstock
Economics
San Fernando High School

2. Sole Proprietorship Sole = alone Proprietor = owner
So, a Sole Proprietorship is a business owned and run by one person
Most numerous of business organizations
Smallest in size...often referred to as a “small business”

3. Forming a Proprietorship
Easiest type of business to start
License
Fees
Proprietorships can be anything from the lemonade stand and mowing lawns, to a lawyer who works alone, a neighborhood restaurant to an auto mechanic, etc.
Entrepreneur – a person who starts and runs their own proprietorship…(you will be interviewing one)

4. Advantages and Disadvantages
Ease of start up
Fairly easy to manage (no other people to answer to), so decisions can be made quickly
Any profits belong only to the owner
No business income tax…only personal income tax
Personal satisfaction
Ease of leaving: pay off any bills and close down

5. Disadvantages:
Unlimited liability: owner is personally and fully responsible for all losses and debts
Difficulty in raising capital
$$ needed to set up a business
$$ needed if you want to expand the business
$$ needed in reserve for repairs/ problems
$$ often raised from family, savings accounts, credit cards (bad )
Size and efficiency: $$ needed to hire employees and carry inventory - stock of goods and parts
Limited life: the business ceases to exist when the owner dies, quits or sells the business

6. Partnership A business owned by two or more persons
Shares many strengths & weaknesses of proprietorship
Least numerous type of business
Small to large sized business
Types:
General partnership: all partners responsible for management and financial obligations
Limited partnership: one or more partners may not be involved in daily running of business, may have contributed $$ to finance the business (have an investment/interest in the business)

7. Forming a Partnership Fairly easy to start:
Legal papers “articles of partnership” drawn up.
Specify arrangements between partners
Specify how profits, losses and financial responsibilities are divided
Specify how future partners are taken in
Specify how property is divided if business ends
Individuals need to be careful because like a proprietorship, they are responsible for personal and business debts

8. Advantages and Disadvantages
Fairly easy to start. Legal papers and fees not too big if spread among partners
Ease of management. Partners often specialize in an aspect of running the business: working with customers, bookkeeping, marketing, etc
Like a proprietorship there are no special taxes. Just personal income taxes
Usually able to get financial capital ($$) from banks more easily than proprietorships
Offer specialization in certain businesses (law, medicine)
Can attract talented people more easily to work for them

9. Each partner is responsible for the acts of all other partners
Disadvantages:
Each partner is responsible for the acts of all other partners
More complicated than Sole Proprietorship because more owners involved
In Limited Partnership one or more partners has limited liability. If the business fails that person loses only their original investment. The general partners are responsible for the remaining debts
Limited Partnerships also affect bankruptcy: when a court allows an individual or business to stop or delay payments of debt. Limited partners are only liable for their original investment…
Potential conflict among partners

10. Corporation
Corporation: from the Latin word meaning to unite or combine in one body
Corporations are the most complex in structure and to create
Corporations are the second smallest business type in number, but the largest in terms of receipts and profits
Receipts: also referred to as gross receipts, is all the income received by a business before subtracting taxes and debts
Profit: also referred to as net profit, is the income remaining after paying any taxes and debts

11. Forming a Corporation Corporations are a formal legal arrangement
People who want to incorporate (create a corporation) file papers with the state government seeking permission. The forms and fees are more numerous and expensive. The state issues a charter – a government document of approval with details of the corporation
Corporations may issue stock or shares: certificates of ownership in the firm
Stocks/shares sold to investors, who are called stockholders/shareholders
Money is used to set up or expand the business
If profitable, a corporation may issue a dividend: a check representing a portion of earnings to the stockholder

14. Corporations account for only about 19% of all businesses
In the United States…
but make over 64% of the profits!
Sole Proprietorships represent nearly 75% of all businesses
but make only 14% of the profits!

15. Corporate Structure
When an investor purchases stock in a corporation, he/she becomes an owner with certain rights. Rights depend on the type of stock: common stock or preferred stock.
Common stock: represents basic ownership of a corporation
Owner receives one vote for each share owned
This vote is used to elect Board of Directors
Board of Directors sets broad policies and goals for the corporation
Board hires professional management to run the business on a daily basis
In theory someone with a majority of shares of common stock can elect themselves or family to the board of directors.
In reality most shareholders don’t vote or vote by proxy (representative) because they have so few shares

16. Other types of officers in a corporation may include:
CEO – Chief Executive Officer
CFO – Chief Financial Officer
COO – Chief Operating Officer

17. Functions like a cross between a bond and a stock
Preferred stock: (Second type of stock) Represents nonvoting ownership in a corporation.
Functions like a cross between a bond and a stock
Unlike bonds, Preferred stock does not expire
Shareholders of preferred stock receive dividends at fixed intervals
If the corporation goes bankrupt, preferred stockholders get back their investment before common stockholders

18. Advantages and Disadvantages
Main advantage is being able to raise capital (two ways)
Sell more stock to investors
Issue bonds: a written promise to pay back money borrowed at a later date.
The amount borrowed is known as principal
The corporation pays interest as the price for the use of another’s money
Board of directors can hire professional managers to run company. This means stockholders can own a share of the company without having to know much about the business

19. Limited liability: in the event the corporation cannot meet its financial obligations, only the corporation is liable. Shareholders are only responsible for their investment
Unlimited life: being a separate legal entity, the name of the corporation lives on when ownership changes
The name of the corporation stays the same and it continues to do business
When stockholders sell or trade stock in a corporation, whomever buys the stock becomes the new owner

20. Disadvantages:
Difficulty and expense of getting a charter (forms, attorney’s fees, filing fees) can cost thousands $$
Separation of ownership from management
After voting for the Board of Directors, control of running the corporation goes to a professional management team
In a proprietorship & partnership: ownership and management are one and the same
Double taxation: dividends are taxed once as corporate profit and again as personal income
Government regulation:
Must register with SEC (Securities Exchange Commission) to sell stock publicly
May require approval to take over another business

21. One final and IMO, messed up note about corporate basics… Corporations are “People!”
Corporations are separate legal entities (beings). Unlike Sole Proprietorships and Partnerships, Corporations have rights
Corporations may:
Buy and sell property
Enter into legal contracts with other corporations and individuals
Sue and be sued
Corporations may donate unlimited $$ to political causes and campaigns through PACs – political action committees.
Individuals (you and I) may only give up to $2,700 per year and likely don’t have the purchasing power of large corporations...
thanks to the Supreme Court decision in Citizens United v. FEC, (2010) which declared corporations are essentially people without the human part…