Chapter 3: Business Organizations

Section 1: Forms of Business Organizations

Key terms: page 61 Activity: graphic organizer for

Business organizations that illustrates the forms of business and the advantages and disadvantages of each.

Sole Proprietorship Easy to start but owners have

unlimited liability. Owned and run by a single individual. Relatively profitable. Bring in one-fifth of total profits

earned by all businesses. Easiest form of business to start. Requirements business licenses and

fees.

Sole Proprietorship

Advantages: Easy to start Management relatively simple Immediate individual decisions Owner keeps the profit Not a separate legal entity: can file

normal individual income tax and business not taxed on income.

Being your own boss.

Disadvantage Sole Unlimited liability Difficulty of raising financial capital to start

up business. Limited managerial experience Attracting qualified employees Limited life: firm legally ceases to exist

when owner dies, quits, sells. Size and efficiency

Small inventory Having enough personnel

Partnership

Each partner fully shares responsibility for operation of business and all profit or losses.

Owned by two or more persons. Smallest proportion of sales and net

income.

Types of Partnerships

General: all partners are responsible for management and financial obligations.

Limited: at least one partner is not active in daily running of business, limited partners has limit responsibility for debts and obligations.

Forming Partnership

Legal papers/ articles of partnership are completed. Allocation of profit and losses Future plans

Advantages Partnership Easy set up Start up fees minimal: attorney and

filling fees. Ease of management, each partner

bringing a different area of expertise to the business.

Lack of special taxes on a partnership. Pays on individual income taxes at end of year.

Advantages (Cont.)

Attract financial capital more easily. More efficient due to slightly larger

size. Easier to attract qualified employees.

Disadvantage Partnerships

General: fully responsible for all other partners acts.

Potential for conflict between partners.

Corporations Are one of the most important forms of business. Easily raise large amounts of financial capital. Account for only 1/5th US businesses. Responsible for majority of sales. A form of business organization recognized by law as

a separate legal entity with all the rights of an individual. The right to buy and sell property. Enter into legal contracts To sue and to be sued.

Forming a Corportation

Very formal and legal arrangements to set up business.

Must final for permission with federal government or state government to receive a charter. Company name, address, purpose,

number of stock shares, ownership certificates.

Corporate Structure

Investors purchase stocks, they become owners with certain ownership rights.

Rights depend on type of stock holder. Common Stock Preferred Stock

Advantages & Disadvantages Limited liability Professional

management to run business.

Unlimited life Easy to transfer

ownership Ease of raising

financial capital Sell more stocks Borrow (bonds)

Must keep detail sells and expense records to pay taxes on profits.

Double taxation- tax on profit and investors dividends taxed.

Difficulty getting charter.

Government regulations

Activity: Chapter 3.1 Activity: graphic organizer for Business

organizations that illustrates the forms of business and the advantages and disadvantages of each. Example of each

On a sheet of paper briefly answer the following questions. If you were going to start a business what

type/form of business would you start. Who would you choose to go into business with and why?