Forms of Business Organizations

Chapter 8: Business Organization

How are businesses formed and how do they grow?

Open Ended

Are you interested in opening a business? Explain yes or no or otherwise.

Open Ended

From the previous slide, write a paragraph outlining the benefits and drawbacks Samantha faces as a sole proprietor and the pros and cons she’d encounter if she ran her cupcake business with her best friend, as a partnership. Think about your answer and then begin to write. Your answer will be graded.

Sole Proprietorships

What makes a sole proprietorship the easiest form of business to start?

The most common form of business organization in the United States is the sole proprietorship or proprietorship—a business owned and run by a single individual. Because proprietorships are basically one-person operations, they comprise the smallest form of business. As Figure 8.1 shows, they are also relatively profitable. While they only account for about 4 percent of total sales, they bring in about 16 percent of the total profits earned by all businesses.

Figure 8.1

Open Ended

These interactive graphs allow you to explore the numbers, sales, and profits of three kinds of business organizations.

Evaluating Why do you think sole proprietorships account for the largest number of organizations, yet have the smallest percentage of total net income?

​Advantages

• As you have just learned, a sole proprietorship is easy to start up. If someone has an idea or an opportunity to make a profit, he or she only has to decide to go into business and then do it.

• Ease of management, the second advantage, also is relatively simple. Decisions do not require the approval of a co-owner, boss, or other "higher-up." This flexibility means that the proprietor can make an immediate decision if a problem or opportunity comes up.

• A third advantage is that the owner can keep the profits of successful management without having to share them with other owners. The owner also has to accept the possibility of a loss, but the lure of profits makes people willing to take risks.

​Advantages

• Fourth, the proprietorship does not have to pay separate business income taxes because the business is not recognized as a separate legal entity. The owner still must pay individual income taxes on profits earned by the sole proprietorship, but the business itself is not taxed separately.

• Suppose, for example, Mr. Winters owns and operates a small hardware store in a local shopping center and a small auto repair business in his garage next to his home. Because neither business depends on the other, and because the only thing they have in common is Mr. Winters’s ownership, the two businesses are separate and distinct economic activities. For tax purposes, however, everything is lumped together at the end of the year. When Mr. Winters files his personal income taxes, the profits from both businesses are combined with any wages and salaries from other sources. He does not pay taxes on either of the businesses separately.

​Advantages

• A fifth advantage of the proprietorship is the psychological satisfaction many people get from being their own bosses. These people often have a strong desire to see their name in print, have dreams of great wealth or community status, or simply want to make their mark in history.

• A sixth advantage is that it is easy to get out of business. All the proprietor has to do is pay any outstanding bills and then stop offering goods or services for sale.

Multiple Choice

This type of business is owned by one person.

• Partnership

• Sole Proprietorship

• Corporation

• Franchise

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SOLE PROPRIETORSHIP: advantages

As the sole ​

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of your business, you have full ​

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of business decisions and ​

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habits.

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SOLE PROPRIETORSHIP: advantages

The ​

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of maintaining a ​

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proprietorship are much less than other business ​

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Dropdown

SOLE PROPRIETORSHIP: disadvantages

Lack of ​

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. There is a ​

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of becoming too relaxed because you are not required to keep financial ​

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Multiple Choice

Advantages of this business type are that the owner is their own boss and gets to keep all the profits.

• Partnership

• Sole Proprietorship

• Corporation

• Franchise

Multiple Choice

What is a major advantage of a business that is a partnership rather than a sole proprietorship?

• The responsibility for the business is shared

• The business is easy to set up

• The partners are not responsible for business debts

• The business is easy to sell

Open Ended

Can proprietorships hire employees? Explain by writing a sentence.

Disadvantages

• The main disadvantage of a proprietorship is that the owner of the business has unlimited liability. This means that the owner is personally and fully responsible for all losses and debts of the business. If the business fails, the owner’s personal possessions may be taken away to satisfy business debts.

• As an example, let us revisit the earlier case of Mr. Winters, who owns and operates two businesses. If the hardware business should fail, his personal wealth, which includes the automobile repair shop, may be legally taken away to pay off debts arising from the hardware store.

Open Ended

In your opinion, if a proprietor owes a debt, and does not pay it, who would be legally liable for that debt? Explain.

Disadvantages

• A second disadvantage of a proprietorship is the difficulty of raising financial capital. Generally, a large amount of money is needed to set up a business, and even more may be required for its expansion.

• However, banks and other lenders are often reluctant to lend money to new or very small businesses. As a result, the proprietor often has to raise financial capital by tapping savings, using credit cards, or borrowing from friends and family.

Open Ended

Give me an example of why it is often difficult to raise capital as a sole proprietor? Write a couple of sentences.

Disadvantages

• The small size of a proprietorship can also be a disadvantage. A retail store, for example, may need to hire several employees just to stay open during normal business hours. It may also have to carry a minimum inventory—a stock of finished goods and parts in reserve—to satisfy customers or to keep production flowing smoothly. Because of limited financial capital, the proprietor may not be able to hire enough personnel or stock enough inventory to operate the business efficiently.

Multiple Choice

Disadvantages for this type of business include: owner pays for everything, hard to get money to start from the bank, owner might lack skills & unlimited liability.

• Sole Proprietorship

• Partnership

• Corporation

• Franchise

Multiple Choice

What is a business owned and operated by two or more people?

• Sole Proprietorship

• Partnership

• Corporation

Multiple Choice

What is ONE advantage of a sole proprietorship?

• You make ALL the decisions

• Easy to raise money

• You have to share profits

• You have to ask for permission to take a vacation

Multiple Choice

Which is ONE disadvantage of Sole Proprietorship?

• Less direct control

• Disagreements

• Hard to raise money

• Unlimited resources

Multiple Choice

Disadvantages include limited life and the potential for conflict between business partners

• Sole Propriotorship

• Partnership

• Corporation

• Government

Multiple Choice

Sara’s Hair Palace is a small, locally owned beauty salon in Mesa. This represents what type of business?

• corporation

• partnership

• sole proprietorship

• Government Agency

Partnerships

How is responsibility shared in a partnership?

A partnership is a business that is jointly owned by two or more persons. As shown in Figure 8.1, partnerships are the least numerous form of business organization in the United States, accounting for the second smallest proportion of sales and net income.

Figure 8.1

Types of Partnerships

• Partnerships share many of the same strengths and weaknesses of a sole proprietorship. While there are several types of partnerships, the most important fall into the following categories:

  • The general partnership is the most common form of partnership. In it, all partners are responsible for the management and financial obligations of the business.

Multiple Choice

Law firms and doctors offices are usually categorized under what type of business organization:

• Partnership

• Corporation

• Sole Proprietorship

• Franchise

Multiple Choice

This means that the business no longer exists when the owner dies, quits or sells:

• Limited Life

• Limited Liability

• Limited Contract

• Limited Proprietorship

Multiple Choice

In this type of partnership, one partner is only held liable to the extent of their investment:

• General Partnership

• Sole Partnership

• Equal Partnership

• Limited Partnership

Drag and Drop

PARTNERSHIP; it can be general or limited.

In​

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both partners invest with 100% of responsibility for any business debts. In ​

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they describe who is responsible for certain debts.

Drag these tiles and drop them in the correct blank above

general partnerships

limited partnerships

Limited Partnerships

• In the limited partnership, at least one partner is not active in the daily running of the business and has limited responsibility for the debts and obligations of the business.

Open Ended

Come up with an example of why people enter limited partnerships? Write 3 sentences or more, if you can.

Advantages of a Partnership

• Like the sole proprietorship, one advantage of the partnership is its ease of start-up. Even the start-up costs of the partnership, which normally involve attorney fees and a filing fee, are minimal if they are spread over several partners.

• Ease of management is another advantage. Each partner usually brings a different area of expertise to the business; one might have a talent for marketing, another for production, another for bookkeeping and finance, and so on. While partners normally agree ahead of time to consult with each other before making major decisions, partners generally have a great deal of freedom to make minor ones.

Advantages of a Partnership

• A third advantage is the lack of separate taxes on a partnership's income. As in the case of a proprietorship, the partners earn profits from the firm and then pay individual income taxes on them quarterly, or at the end of the year. Partners have to submit separate schedules to the Internal Revenue Service detailing their profits from the partnership, but this is for informational purposes only and does not give a partnership any separate legal status.

Advantages of a Partnership

• Fourth, partnerships can usually attract financial capital more easily than proprietorships. This is because they are generally larger and have a better chance of getting a bank loan. The existing partners could also take in new partners who bring financial capital with them as part of their price for joining.

Advantages of a Partnership

• A fifth advantage of partnerships is the more efficient operations that come with their slightly larger size. In some areas, such as medicine and law, a relatively small firm with three or four partners might be just the right size for the market. Other partnerships, such as accounting or investment firms, may have hundreds of partners offering services throughout the United States.

Multiple Choice

Advantages of this business include: easier to get money from the bank to start, share skills and share risks.

• Sole Proprietorship

• Partnership

• Corporation

• Franchise

Multiple Choice

What is a disadvantage of partnerships?

• ease of formation

• limited liability

• owners share responsibilities

• possibility of personality conflict

Multiple Choice

A father who wants to take his son into the business with him should form this type of business.

• Sole Proprietorship

• Corporation

• Partnership

• LLC

Multiple Choice

How is a general partnership organized?

• Every partner shares equally in both responsibility and liability.

• No partner is responsible for the debts of the partnership beyond his or her investment.

• The doctors, lawyers, or accountants who form a general partnership hire others to run the partnership.

• Only one partner is responsible for the debts of the partnership.

Disadvantages of a Partnership

• This is where the two types of partnerships differ. The general partnership has the disadvantage that each partner is fully responsible for the acts of all other partners. If one partner causes the firm to suffer a huge loss, each partner is fully and personally responsible for the loss. This is similar to the unlimited liability feature of a proprietorship, but it is more complicated because more owners are involved.

Disadvantages of a Partnership

• Lets say Gianna partners with Monika and they open a bakery shop as General Partners. Monika decides to not take the business as seriously and bakes good that are not very tasty.

• They begin to loose business and they are losing profits.

• What does Gianna do?

Disadvantages of a Partnership

• In the case of the limited partnership, a limited partner’s responsibility for the debts of the business is limited by the size of his or her investment in the firm. If the business fails and debts remain, the limited partner loses only the original investment, leaving the general partners to make up the rest. So, if a limited partner contributed $50,000 to a partnership, and if the partnership was sued and subsequently owed tens of millions, the most the limited partner could lose would be $50,000.

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