Forms of Business Organization in the USA

Basic forms Sole proprietorship Partnership Corporation

Sole proprietorship - advantages The simplest way to set up a business – low start-up costs Less administrative paperwork Owner in direct control of decision making Minimal working capital required All profits to the owner

Disadvantages Owner fully responsible for all debts and obligations related to his or her business Creditor would normally have a right against all of his or her assets, business or personal (unlimited liability) Difficult to raise capital Lack of continuity in business organization in the absence of the owner

Partnership A partnership is an agreement in which two or more persons combine their resources with a view to making a profit A partnership agreement should be drawn up

General partnership All members share the management of the business Each member is personally liable for all the debts and obligations of the business Each partner must assume the consequences of the action of other partner(s)

Limited partnership Some members are general partners who control and manage the business and may be entitled to a greater share of the profits Other partners are limited and contribute only capital, take no part in management and are liable for debts to a specified extent only A legal document, setting out specific requirements, must be drawn up

Partnership - advantages Ease of formation Low start-up costs Additional sources of investment Broader management base

Partnership - disadvantages Unlimited liability for general partners Lack of continuity Capital divided authority Possible conflicts between partners

Corporation - definitions A legal entity that is separate from its owners, shareholders An artificial person created under law and empowered to achieve a specific purpose An organization formed with the state governmental approval to act as an artificial person to carry on business (or other activities) for profit

Types of corporations Private business corporations – the Articles of Corporation Non-profit corporations (for religious, educational or charitable purposes) Public corporations (formed by governments for public purposes) Close corporations (a few shareholders with a working or familial connections permitted to operate informally) De jure corporations (formally operated under the law); de facto corporations operate as if they were legal, but without the Articles of Incorporation being valid

The Articles of Incorporation The document that sets out the rules for running the company’s internal affairs Includes the names of the incorporators (the responsible parties), the amount of stock it will be authorized to issue and its purpose Determines the rights and obligations of members and directors Shareholders elect a board of directors

Corporation - advantages Perpetual life (succession) – continuous existence; a corporation lives on regardless of the change in the structure of shareholders Limited liability (a corporation’s liability for damages or debts is limited to its assets, so the shareholders protected from personal claims, unless they commit fraud) Access to capital – easier to raise capital, as a corporation can issue shares of stock to raise funds Transferability of shares (or of ownership) – shares can be bought, sold, exchanged or given Professional, specialized management – hired by shareholders to manage the operation

Disadvantages Closely regulated The most expensive form to organize Extensive record keeping necessary Higher taxation (double taxation of dividens, larger business tax rates)

Corporations in the USA Out of all business organization forms, corporations amount only to 20 percent They do 80 percent of the busines in the country