U3C8: Types of Business Organizations Economics

Main Idea Most of the producers in a market economy are business organizations, commercial or industrial enterprises and the people who work in them. The purpose of most business organizations is to earn a profit.

Essential Question What are the types of business structures and what are the advantages and disadvantages of each?

8.1 Sole Proprietorships Most common type of business organization in the United States A business owned and managed by a single person Account for more than 70% of all businesses in U.S. Generate less than 5% of all sales by American businesses

Sole Proprietorships Advantages Disadvantages easy to open or close few regulation freedom and control owner keeps profits limited funds limited life unlimited liability

8.2 Forms of Partnerships A partnership is a business owned by two or more people, or “partners,” who agree on how responsibilities, profits, and losses will be divided 3 types: general partnerships, limited partnerships, limited liability partnerships General: most common type; partners share responsibility, liability, and profits equally, unless there is a partnership agreement that specifies otherwise Limited: at least one partner is not involved in the day to day running of business and is liable only for the funds he or she has invested Limited liability: (LLP) a partnership in which all partners are limited partners and not responsible for the debts and other liabilities of other partners (medical partnerships, law firms, and accounting firms)

Sole Proprietorships v. Partnerships one owner easy to open few regulations freedom and control limited funds limited life unlimited liability two or more owners easy to open few regulations joint decision making access to resources limited life unlimited liability on most cases

Partnerships: Advantages and Disadvantages Easy to open and close Few regulations Access to resources Joint decision making specialization Unlimited liability Potential for conflict Limited life

8.3 Corporations, Mergers, and Multinationals Characteristics of Corporations Third main kind of business organization Owned by individuals called shareholders and stockholders Shareholders own rights to the companies profits, but face limited liability for the company’s debts and losses A Corporation that issues stock and can be freely bought and sold is called a public company One that retains control over who can buy or sell the stock is called a private company Corporations make up 20% of business in US, produce most of the goods and services and employ the majority of Americans

Corporations: Advantages and Disadvantages Access to resources Professional managers Limited liability Unlimited life start-up cost and effort Heavy regulation Double taxation Loss of control

Business Consolidation Horizontal merger: joining of companies that offer similar products or services Vertical merger: joining of companies involved in different steps of production or marketing of a product or service Conglomerate: merger of companies that produce unrelated goods or services Multinational corporation: large corporation with branches in several coutries

8.4 Franchises, Co-ops, and Nonprofits Advantages: training, advertising (fast food) Disadvantages: risk, loss of control Co-ops 3 types: consumer, service, producer Consumer: (organic food cooperative) Service: (credit union) Producer: (agricultural products) Nonprofits No profit and no taxes (Salvation Army, American Bar Assiciation)