Forms of Business Organization

A business that is owned and operated by a single individual Sole Proprietorships A business that is owned and operated by a single individual Sole proprietorships are ready for business as soon as they set up operations The most common form of business organization in the US is a sole proprietorship

Sole Proprietorships Advantages Easiest form of business to start Decisions do not require approval from ‘higher up’ Keep all profits Does not pay separate business income taxes Psychological factor of being own boss Easy to get out of business

Sole Proprietorships Disadvantages Owner has unlimited liability Difficult to raise capital Size and efficiency Cost of carrying minimum inventory Often has limited managerial skills Difficult to attract qualified employees Larger employers can offer more

Partnership Business that is jointly owned by two or more persons General Partnership – all partners are responsible for management and financial obligations Limited Partnership – at least one partner is not active in the daily running of the business Least numerous form of business in the US

Partnership Advantages Ease of startup Formal legal papers called ‘articles of partnership’ are usually written Ease of management/varied expertise Lack of special taxes Easier to attract capital investments than sole proprietorship More efficient Easier to find good employees

Disadvantages Partnership In a general, each partner is responsible for acts of all partners In a limited, if the limited partner loses their investment, the other partners must make up the loss Potential for conflict between partners

Corporations Form of business organization recognized by law as a separate legal entity with all the rights of an individual Gives corporations the right to buy and sell property, enter into legal contracts, and to sue and be sued Accounts for about one fifth of businesses, but is responsible for the majority of all sales

Corporations Forming a Corporation Must file for permission with the national government If approved, a charter is granted, which is a document giving permission to create a corporation Charter specifies the number of shares of stock to be sold Stock is broken in to Common Stock and Preferred Stock Profits from business are distributed to stockholders as dividends

Advantages Corporations Ease of raising money Owners have limited liability Directors can hire professional managers to run daily operations Ease of transferring ownership

Corporations Disadvantages Detailed records need to be kept for payment of taxes Double taxation of corporate profits Difficulty and expense to get a corporate charter Owners or shareholders have little voice in business operations Subject to more government regulations