Comparisons of Forms of Business Organization Sole proprietorships Partnerships Corporations
Learning Goal 2 What are the advantages and disadvantages of sole proprietorships?
Sole proprietorships Advantages easy and inexpensive to form & dissolve profits all go to owner direct control of business freedom from government regulations no special taxation Disadvantages hard to raise capital unlimited liability & potential loss limited expertise in all areas trouble finding employees large personal time commitment unstable business life
Partnerships Advantages easy and inexpensive to form diverse skills and expertise flexibility relative freedom from government regulations no special taxation Disadvantages potential conflicts between partners unlimited liability & potential loss sharing profits hard to leave or end partnership
Purpose & duration of partnership Roles, responsibilities, compensation Contributions Procedures for adding/removing partners Buy-out procedures Dispute resolution Financial arrangements Dissolving the partnership Valuation Topics to Cover in a Partnership Agreement Source: American Express Small Business Exchange, home3.americanexpress.com/smallbusiness
Corporation : A legal entity with an existence and life separate from its owners, who therefore are not personally liable for its debts; it can own property, enter into contracts, sue and be sued, and operate under terms of its state charter.
Why does the corporate structure provide advantages and disadvantages to a company, and what are the major types of corporations?
Corporations Advantages limited liability easy to get financing easy to transfer ownership unlimited life-span tax deductions Disadvantages double taxation of profits costly & complex to form government restrictions
1.S corporations 1. S corporations organized like a corporation, but avoids double taxation of profits by routing income and losses through stockholders 2.Limited liability companies (LLC) 2. Limited liability companies (LLC) offers same limited liability as a corporation, but may be taxed as either a partnership or corporation Types of Hybrid Corporations
Pros Protection of personal assets Avoid double- taxation of profits Flexible management & organization Good for foreign investors Some Pros and Cons of LLC’s Cons Often required to have a limited life (< 30 years) Not corporations, so can not issue stock Source: The Company Corporation, www.incorporate.com
Does a company have any business organization options besides sole proprietorship, partnership, and corporation? Limited Liability Company Limited Liability Company Provides limited liability for its owners Taxes like a partnership Cooperatives Cooperatives Collectively owned by individuals or businesses with similar interests Combine to achieve more economic power Joint venture Joint venture An alliance of two or more companies Formed to undertake a special project Franchises Franchises Business arrangement between a franchisor and franchisee Franchisee uses business name and logo of franchisor
Formed by people with similar interests, such as customers and suppliers lower costs increased economic power share in profits Members/owners pay annual fees Common in: –agriculture –hardware/lumber –grocery Cooperatives
Joint Venture: 2 or more companies form an alliance to pursue a specific project, usually for a specific time period