Chapter Three – Forms of Business Organization

Section One – Forms of Business Organizations Sole Proprietorships – A business owned and run by one person a. Forming a Proprietorship i. Very little start up costs outside of maybe a license and fees b. Advantages i. Ease of start up ii. Ease of management iii. Full profits iv. Only pays taxes once v. Ease of closing up shop

c. Disadvantages i. Unlimited liability a. The owner is responsible for any debts and losses ii. Difficulty in raising financial capital iii. Lack of capital to hire a full staff or have adequate inventory iv. May have limited managerial experience v. Difficulty of attracting qualified employees vi. Limited life

II. Partnerships – Jointly owned by two or more people a. Types of Partnerships i. General Partnership – Everyone is responsible for management and financial obligations ii. Limited Partnership – One or more members are not active daily b. Forming a Partnership i. Articles of partnership specify the arrangements between partners c. Advantages i. Ease of establishment ii. Ease of management iii. Can usually attract financial capital more easily than proprietorships a. Can take in new partners, and are usually bigger iv. Efficient operations v. Ability to attract top talent

d. Disadvantages i. Each partner is fully responsible for the acts of the others ii. Limited Life iii. Potential for conflict between partners

III. Corporations – A form of business organization recognized as a separate legal entity a. Forming a Corporation i. A very formal, legal arrangement ii. Must apply for a charter from the national or state government a. Specifies the number of shares of stock iii. Uses the money raised from stock to set up the corporation a. May issue a dividend if profitable

b. Corporate Structure i. An investor becomes an owner when they purchase stock, their rights are determined by the type or stock they hold a. Common – One vote per share (elect a board of governors) b. Preferred – Nonvoting ownership shares (but receives dividends first)

c. Advantages i. Ease of raising financial capital a. Sell more stock or issue bonds ii. Can hire professional managers iii. Limited liability iv. Unlimited life v. Ease of transferring ownership d. Disadvantages i. Difficulty and expense of getting a charter ii. Shareholders have little say in how the business is run iii. Double taxation of corporate profits a. Status as a separate legal entity iv. Subject to more government regulation

IV. Government and Business Regulation a. Business Regulation i. Set a goal of protecting consumer interests starting in the progressive era ii. Rigorous laws regulating, banks, insurance companies, gas, communications and transportation services b. Business Development i. States compete with each other for business opportunities ii. Started with selling industrial development bonds in the 30’s iii. Continues today with tax credits