Chapter 3Business Organizations

Sole Proprietorships

• A business owned and run by one person

– Most common type of bus. org.

– Generate least amount of profit (income) compared to other bus. orgs.

Sole Proprietorships (cont.)

• Advantages:

– Easiest to start or exit (low start-up costs and ease of operation - simplicity)

– Independence (your own boss)

• You make all the decisions

• You earn all the profits

Sole Proprietorships (cont.)

• Disadvantages:

– Unlimited liability – you are responsible for $ owed.

– Difficult to raise $ (“financial capital”) or expand

– Hard to find good employees

Partnerships

• A business jointly owned by two or more persons. (least common type of bus. org.)

– General = all share in $ and decisions

– Limited = only share $ (one person has the “know-how”)

Must be careful because legally tied together.

Partnerships (cont.)

• Advantages

– Ease of start-up & management

– Share financial burden (little easier to fund)

– Larger bus. + better employees

Partnerships (cont.)• Disadvantages

– Each partner is responsible for other’s actions

• liability extends to everyone involved

• Conflicts may arise

Note: limited partners have limited liability though

Corporations• Most of business (revenue and profit) in

America is done by this type of bus. org. (~70%)

• A business recognized by law as a separate legal entity– In other words: it is a formal, legal

arrangement that has lots of rules & steps to follow

– It must be organized and run in very specific ways (monitored by gov., of course!)

Corporations (cont.)• Must get a charter (gov. permission to start a

corp.)

• Charter will state how many shares of stock are issued in your comp.

– A share of stock is an ownership certificate in your company

Corporations (cont.)• Common Stock = basic ownership in a

company– You get one vote for each share you own

• Preferred Stock = nonvoting ownership shares in a corp.– Receive dividends first! That’s cool

Figure 3.2Stock OwnershipFigure 3.2Stock Ownership

Corporations (cont.)

Figure 3.3Ownership, Control, and Organization of a Typical CorporationFigure 3.3Ownership, Control, and Organization of a Typical Corporation

Corporations (cont.)• Advantages:

– Ease of raising financial capital

– More expertise in running the firm

– Limited liability for owners

– Ease of transfer (sell your stock!)

Corporations (cont.)• Disadvantages:

– Difficulty and expense of getting a charter

– Little say in how the comp. is run

– Corporate tax

– Subject to scrutiny by gov. (SEC)