1. Business Organizations
Chapter 3
Business Organizations

2. Types of Firms
Sole proprietorship – a business owned and run by one person.
In 2000, 73% of all businesses in the U.S. were sole proprietorships.
Advantages of sole proprietorships:
-easy start-up
-flexible (can make decisions quickly)  management is all you
-the profits are yours
-you are your own boss
-no business taxes; all income for you
-easy exit  pay your bills and stop working

3. Disadvantages of sole proprietorships
-unlimited liability  you are responsible for everything
-it’s hard to borrow money
- Size and efficiency—you have to do everything yourself. You may be good at some things (making the product) but not at others (keeping the financial records, doing the insurance paperwork)
-limited management experience
-hard time finding qualified employees
-limited life – business dies when you die

4. Partnerships
Partnerships – business jointly owned by two or more persons.
In 2000, partnerships accounted for 7.1% of business organizations in the U.S.
There are two types of partnerships:
*general partnerships – all partners actively run the business
*limited partnership – at least one partner is not active in running the business and has limited responsibility for the debts & obligations of the business.

5. Warning  You are responsible for the debts of your partners!
Forming a Partnership
It’s sort of like getting a marriage pre-nup.
Legal papers are drafted that specify:
-how profits are divided.
-how new partners may join.
-how property is divided if the partnership ends.
Warning  You are responsible for the debts of your partners!

6. Advantages of partnerships:
-easy to start
-easy to manage
-you get your share of the profits
-can attract financial capital easier than sole proprietorships
-larger, so some economies of scale present
 More efficient operations (people can specialize)
-easier to attract qualified employees

7. Disadvantages of partnerships:
-responsible for the acts of all the other partners
-if you are a limited partner, not involved in daily activity, you only lose your original investment
- limited life  when a partner dies or leaves, it ends. It must be dissolved legally and reorganized with the remaining partners. (They usually want to keep the old name.)
-conflict between partners
-bankruptcy – if you’re not a limited partner, you have to pay any debts!

8. Corporations
Corporation – a form of business organization that is recognized by the law as having all the legal rights of an individual.
They have the right to buy & sell property, enter into legal contracts, and to sue & be sued.
In 2000, corporations were 19.9% of business organizations, but were responsible for 88.8% of all sales.

9. Corporations Forming a Corporation: Corporate Structure:
File for permission from the federal (national) government or the state where your HQ will be
“charter” is granted: states name, address, purpose, number of shares of stock, etc.
Sell stock (“IPO”) at an initial price
Stock value goes up and down according to your profitability
Issue dividends (hopefully)
Corporate Structure:

10. Stock? Stock – a certificate of ownership in a firm.
Stockholders – a.k.a. – shareholders – investors in a corporation (they own stock).
The money from the stockholders (investors) is used to set up the firm. This money is called financial capital.

11. Types of Stock
Common stock – basic form of ownership in a corporation. Each share is worth one vote for the board of directors, who run the company.
Preferred Stock – non-voting shares of stock, but these shareholders receive profits before common stockholders.

12. Figure 3.3 Ownership, Control, and Organization of a Typical Corporation

13. Advantages of Corporations
Easy to raise financial capital
1.) sell stock
2.) issue bonds  a written promise to repay the amount borrowed in the future
Hire professional managers
Limited liability for the corporation’s owners: the corporation itself is responsible for all debts, not the owners. If it goes out of business, stockholders do not have to repay the corporation’s debts.
Unlimited life – the firm doesn’t die when a shareholder does.

14. Advantages of Corporations
Ease of transferring ownership:
 If you don’t want to be part owner any more, you just sell your stock.
 Much easier than a sole proprietorship trying to find someone to buy the entire business.

15. Disadvantages of Corporations
Difficult to start
Shareholders have little say about how the business is run
Double taxation – the firms profits are taxed and then the profit that is distributed to shareholders is also taxed.
Subject to government regulation.

16. Disadvantages of Corporations
Corporations are subject to more government regulation than sole proprietorships and partnerships.
 register with the state
 register with the Securities & Exchange Commission—the SEC—to sell stock to the public
 publish info on their sales and profits on a regular basis
 get approval to buy or merge with other companies.

17. LLCs - “Limited Liability Company”
The major advantage of a Sole Proprietorship is no double taxation. Its owner just calculates her profits and reports them as her income, and pays income taxes.
The major disadvantage of a Sole Proprietorship is its UNlimited liability.
For instance, if someone slips and falls in her Sole Proprietorship, the injured person could sue her for the business assets, her home, and other personal assets of the proprietor.

18. LLCs - “Limited Liability Company”
Forming your company as an LLC instead of a Sole Proprietorship keeps the major advantage and loses the disadvantage: it keeps single taxation but limits the liability of the owners for losses and debts of the company.
For instance, if a client slips and falls on the property of an LLC, the injured person can only sue for assets that belong to the company (not the proprietor’s personal assets).
Sole Proprietors can also take out “liability insurance” in case of accident or injury.