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Chapter 3Business Organizations
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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.
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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
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Sole Proprietorships (cont.)
• Disadvantages:
– Unlimited liability – you are responsible for $ owed.
– Difficult to raise $ (“financial capital”) or expand
– Hard to find good employees
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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.
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Partnerships (cont.)
• Advantages
– Ease of start-up & management
– Share financial burden (little easier to fund)
– Larger bus. + better employees
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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
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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!)
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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
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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
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Corporations (cont.)
Figure 3.3Ownership, Control, and Organization of a Typical CorporationFigure 3.3Ownership, Control, and Organization of a Typical Corporation
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Corporations (cont.)• Advantages:
– Ease of raising financial capital
– More expertise in running the firm
– Limited liability for owners
– Ease of transfer (sell your stock!)
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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)
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