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

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”

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)

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

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

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)

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

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

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

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

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

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!

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

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

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

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

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

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

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…