1. What are the advantages and disadvantages of each?
Unit Three: Microeconomics
Types of Businesses
What are the advantages and disadvantages of each?
Sole Proprietorships
Partnerships
Corporations

2. Three Types of Businesses
Partnerships
Owned by two or more people, called partners
Corporations
Owned by stockholders, those who purchase shares of its stock

3. Sole Proprietorships Owned by one person, the proprietor
Seven out of every 10 businesses is a sole proprietorship
Common in these industries
Health care
Real estate
Retail trade
Agriculture
The arts

4. Advantages of a Sole Proprietorship
EOC Study Guide
Microeconomics # 3
Advantages of a Sole Proprietorship
Easy and cheap to start up
Ease of decision making
You are your own boss
You don’t need anyone’s approval to try something new
You can respond rapidly to changing market conditions
Register the name of the business
Check and conform to regulations
Obtain any necessary licenses and permits
Keep records and prepare tax forms

5. Advantages of a Sole Proprietorship Continued
EOC Study Guide
Microeconomics
# 3 Cont.
Advantages of a Sole Proprietorship Continued
Ownership of profits
All of the profits belong to YOU!
Tax benefits
Your profits are considered part of your ordinary income
Intrinsic rewards
The feeling of accomplishment from building a successful business
You decide how much of each year’s profits to invest back into the business
The rest is yours!

6. Disadvantages of a Sole Proprietorship
EOC Study Guide
Microeconomics
# 3 Cont.
Disadvantages of a Sole Proprietorship
Burden of responsibility
All tough decisions are on your shoulders
Employees look to you for guidance
If you are sick or on vacation its still your responsibility
Difficulty raising funds
Banks may not want to lend money
Many end up funding their start-up with savings or borrowing from friends and family

7. Disadvantages of a Sole Proprietorship Continued
EOC Study Guide
Microeconomics
# 3 Cont.
Disadvantages of a Sole Proprietorship Continued
Unlimited liability
Sole proprietors are personally responsible for all the debts and other obligations of the business
You may have to use your personal wealth (perhaps even sell your house) to settle or fight a lawsuit

8. Partnerships A for-profit business owned by two or more people
Only 1 in 10 businesses are partnerships
Common in these industries
Stores
Restaurants
Contractors
Law firms
Medical practices
Business consulting firms

9. How to Create a Partnership
Easy to start
Register the name of the business
Check and conform to regulations
Obtain any necessary licenses and permits
Keep records and prepare tax forms
Create a partnership agreement
Partnership agreements identify:
the roles, responsibilities and obligations of the partners
solutions to what-ifs
which partners are general partners and which are limited partners

10. Advantages of a Partnership
EOC Study Guide
Microeconomics # 1
Advantages of a Partnership
Larger pool of financing
Each partner can contribute funds
Banks are more willing when they can collect from more than one person
Shared decision making
Tough decision burden is shared
If one is ill or on vacation, the other can handle the firm
Benefits of specialization
Each can work at the tasks he or she is best suited, such as sales or accounting

11. Disadvantages of a Partnership
EOC Study Guide
Microeconomics # 1 Cont.
Disadvantages of a Partnership
Unlimited liability for general partners
Each general partner shares personal responsibility for all the debts and other obligations of the business
If the business fails, or someone sues the business you will need to use your personal wealth to pay it back
Disagreement among partners
If you don’t agree on a decision, you might argue endlessly or generate bad feelings

12. Corporations Corporations are legal entities
The law treats corporations similar to how it treats people
They can own property, enter into contracts with people or other businesses, and bring lawsuits

13. Creating a Corporation
Much more expensive and time consuming than creating a partnership or sole proprietorship
One in 5 businesses are corporations
Complete a corporate charter, or certificate of incorporation
Corporate charter must state how the company will raise money to finance start-up costs
Sets an upper limit on the number of shares of stock to be sold to investors
Details the organizational structure

14. Advantages of a Corporation
EOC Study Guide
Microeconomics # 2
Advantages of a Corporation
Limited liability for stockholders
Stockholders losses are limited to what they paid to buy their shares of stock
No one can go after their personal wealth
Ability to raise funds by issuing stock
Only corporations can raise money by selling stock
Ability to raise funds by issuing bonds
Only corporations can borrow money directly from the public by issuing and selling bonds

15. Advantages of a Corporation Continued
EOC Study Guide
Microeconomics # 2
Advantages of a Corporation Continued
Rapid growth
If successful, can get large amounts of money quickly
Can take advantage of economies of scale—which means that the cost per unit falls as output rises, thanks to major costs being spread over a growing quantity of output.
Example of economies of scale
Developer spends $5,000 creating a cell phone app
If one person buys the app, the developer’s fixed cost per unit is $5,000
If 1,000 people buy the app, the developer’s fixed cost per unit is $5

16. Disadvantages of a Corporation
EOC Study Guide
Microeconomics # 2
Disadvantages of a Corporation
Expensive start-up costs
Forming a corporation involves higher legal fees
Low nonmonetary rewards
No satisfaction from running your own business
Delays in decision making
Layers of decision makers can make it difficult to move fast as market conditions change
Bureaucracy means decisions can take longer—decisions need to be approved by departments, marketing, human resources, accounting, legal affairs, and corporate leaders

17. Typical Structure of a Corporation
Understanding Corporate Structure

19. Disadvantages of a Corporation Continued
EOC Study Guide
Microeconomics # 2
Disadvantages of a Corporation Continued
Divided ownership of profits
Corporate profits are divided among stockholders
Decisions about how to spend profits are made by the corporation’s managers and board of directors
Tax treatment—Double taxed!
Corporate profits are taxed, then any profits paid to stockholders are taxed again (as income)
More reporting requirements
Corporations face more regulations than other business types
Stricter health, safety, and environmental rules
More closely monitored

20. Most businesses are sole proprietorships
Most business revenues go to corporations

21. What is the Ethical and Social Responsibility of Business?
“There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud.” --Milton Friedman Ted Talks