1. Business Firms

2. Why do Business Firms Exist? Business firms exist when people working together can produce more than the sum of individuals working alone can produce. Key Terms: Business Firm, shirking, monitor, residual claimant

3. Types of Business Firms Sole Proprietorships- Single Owner Partnerships-Two or more who own a certain stake in business Corporations-Owned by Stockholders

4. SOLE PROPRIETORSHIP ADVANTAGES Easy to form and to close. All decision-making power resides with sole proprietorship. Profit of the firm is taxed once.

5. SOLE PROPRITORSHIP DISADVANTAGES Unlimited liability-owner responsible for all debts incurred by the business Limited ability to raise funds Ends with retirement or death

6. PARTNERSHIPS ADVANTAGES Specialization can be utilized Profit is to the partners and only personal income tax is applied (taxed once)

7. PARTNERSHIPS DISADVANTAGES Partners liability is unlimited Decision making can be complicated

8. CORPORATIONS ADVANTAGES Owners (stockholders) have no liability for debts incurred by the corporation Continue to exist even if one or more owners sell their shares or die Able to raise large sums of capital

9. CORPORATIONS DISADVANTAGES Subject to double taxation Complicated to set up