Business Organization Econ 9/12

Warm Up Think of a business you would like to start. Would you want to start it alone or with someone? Why? What would make a good partner?

Sole Proprietorship Sole proprietorships – owned by one person Advantages: 1. Easy to start and manage 2. Keep all profits 3. No business income taxes (just personal) 4. Ease of management 5. Psychological satisfaction 6. Ease of getting out of business

Sole Proprietorship Disadvantages: 1. Unlimited liability (owner is personally responsible for all losses and debts 2. Difficulty raising financial capital 3. Size and efficiency 4. Limited managerial experience? 5. Difficult to attract quality employees 6. Limited life

Partnerships Partnerships: Two or more owners Types of partnerships: General: all partners responsible for management and obligations Limited: at least one partner not active in daily running of business (investor) Advantages of partnerships: 1. Ease of establishment and management 2. Lack of special taxes – no special legal status 3. Attracts financial capital easier than proprietorships 4. Larger size 5. Easier to attract top talent

Partnerships Disadvantages: 1. Each partner is responsible for the other 2. Limited partnership = limited liability 3. Limited life 4. Potential for conflict

Corporations Corporation: Recognized by law as a separate legal entity – can buy land, sue and be sued,etc. Forming a corporation: Apply with government to receive charter (this allows a corporation to have stock)

Corporations Selling/buying stock Common stock: basic ownership of corporation (one vote per share) Elect board of directors and professional management team to run the business Preferred stock: nonvoting ownership Receives dividends before common stockholders

Corporations Advantages: 1. Easy to raise capital = sell shares of stock, issue bonds 2. Directors hire professional managers 3. Limited liability for owners: corporation, not owners, are fully responsible 4. Unlimited life 5. Easy to transfer ownership = simply sell stock to someone else

Corporations Disadvantages: 1. Difficult and expensive to get a charter 2. Owners have little say in how the business is run 3. Double-taxation (Dividends taxed twice – corporate profit and again as personal income) 4. Subject to more govt regulation

Gov and Business Regulation Business regulation since the 1900s has led to laws on insurance rates, licensing exams, protect consumer interests, regulate utilities, etc. Business development: State govts active in trying to attract new industry Tax credits