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CHAPTER 4 The Business of Business
MAJOR BUSINESS FORMATIONS IN THE US
Sole Proprietorship
Partnership
Corporation
S-Corporation
Limited Liability Company
SOLE PROPRIETORSHIP
An unincorporated business that is owned by one person
Form of Business
Advantages Disadvantages
Sole Proprietorship
72% of all US Businesses
• Ease of Formation
• “You’re the Boss”
• Potential Profits
Partnership
ADVANTAGES OF THE SOLE PROPRIETORSHIP
Easy to formThe most important advantage of a SP. Aside from some local licenses, you can “Open the Doors and Sell”
“You’re the Boss”The appeal for working for oneself is
huge. As a proprietor, you are free to run the business anyway you see fit
Potential ProfitsAs a sole owner, you don’t have to
share profits with anyone. Plus there are NO LIMITS to how much you can earn.
SOLE PROPRIETORSHIPS
With this said, how much of the businesses in the US are “sole proprietorships”?
72%
Form of Business
Advantages Disadvantages
Sole Proprietorship
72% of all US Businesses
• Ease of Formation
• “You’re the Boss”
• Potential Profits
• Unlimited Liability
• Limited Capital
• Burden of Financial Responsibility
• Limited Life
Partnership
DISADVANTAGES OF THE SOLE PROPRIETORSHIPUnlimited Liability
While there are NO LIMITS to profits, there are also no limits on the amount of debt that can add up. This is “Unlimited Liability”
Two out of three new businesses fail within four years of opening
Limited Capital The amount that the single owner can raise is
limited to that person’s size of their savings and ability to borrow.
Limited Life If you decide to close the business, or if you pass
away without a written will, the business’s limited life is up. Therefore, lenders generally are cautious about lending to sole proprietorships since they may only last a few years
PARTNERSHIP
An unincorporated business owned by two or more people
Form of Business
Advantages Disadvantages
Sole Proprietorship
72% of all US Businesses
• Ease of Formation
• “You’re the Boss”
• Potential Profits
• Unlimited Liability
• Limited Capital
• Burden of Financial Responsibility
• Limited Life
Partnership
• ”Two Heads Are Better Than One”
• Ease of Formation
• Additional Capital
ADVANTAGES OF THE PARTNERSHIP Additional Capital
A principle advantage over a SP is the available capital (money) is increased by whatever the additional partners bring in
“Two Heads Are Better Than One”Partners could mean more free
time, more skills, talents, and ideas on how to grow the business
Easy to Organize Partnerships, like sole
proprietorships, are fairly easy to organize
Form of Business
Advantages Disadvantages
Sole Proprietorship
72% of all US Businesses
• Ease of Formation
• “You’re the Boss”
• Potential Profits
• Unlimited Liability
• Limited Capital
• Burden of Financial Responsibility
• Limited Life
Partnership
• ”Two Heads Are Better Than One”
• Ease of Formation
• Additional Capital
• Limited Life
• Partners May Disagree
• Difficult to Sell
• Unlimited Liability
• Limited Capital
DISADVANTAGES OF THE PARTNERSHIP Limited Life
Perhaps even more then SP’s, when a partner dies or resigns, a new partnership must be created or the business can go away.
Partners May Disagree The possibility of conflict among partners is an
easily seen weakness of a partnership. Studies have shown that disagreement of partners is a frequent cause of business failure
Difficult to Sell It is difficult to find a replacement partner when
one wants to withdraw from a partnership. The question of fairness for selling ones ownership in a business becomes a hugely contested idea where the buyer wants to buy low and the seller wants the maximum price.
DISADVANTAGES OF THE PARTNERSHIP Limited Capital
The amount of capital that partnerships can raise is limited by the wealth of the partners, the business’s earning power, and its ability to borrow
Unlimited Liability The principle disadvantage of the
partnership can be summed up in two words: unlimited liability. This means each partner or group of partners could be held personally liable for the debts of the business.
Again, since the profits AND the debts can be unlimited, many people are reluctant to enter into partnerships because it makes them personally liable for the debts of the business.
CORPORATIONS
A business organization licensed to operate by a state or the federal government
HOW TO CREATE A CORPORATIONA corporation’s license is called a charterA charter gives the firm the right to do
business and issue a specific number of shares of stock.
Shares of stock are certificates representing ownership of a company
Anyone holding 1 or more shares is a partial owner of a corporation
Those who own shares of stock are also called Share holders- However shareholders do not run the day to day operations nor are they legally liable for the debt of companies
CORPORATE STRUCTURE
Shareholders >Elect > Board of Directors
Board of Directors> Appoints> Officers (CEO, COO, CFO, ETC)
The Officers> Hire> The President/ Presidents
The Presidents> Hire> The Vice President/ VPs
The Vice Presidents> Hire> Managers
The Managers> Hire> Employees
HOW LARGE CORPORATIONS ARE ORGANIZED
Shareholders: again, these are the owners of the company but can number in the hundreds of thousands if not millions
Therefore, the Officers and the Board of Directors of a Corporation place individuals to run the day to day operations of a corporations.
HOW LARGE CORPORATIONS ARE ORGANIZED
The Board of Directors are elected by the Shareholders of the corporation to appoint the officers of the corporation.
The way shareholders vote is 1 share equals 1 vote. If one person holds 25,000 shares, they get 25,000 votes. Therefore large shareholders can appoint themselves “Chairman of the Board”
The role of the Board of Directors therefore is appoint the officers of the corporation on behalf of the shareholders.
HOW LARGE CORPORATIONS ARE ORGANIZEDThe Officers of a Corporation are
SELECTED/ appointed by the board of directors of the corporation.
Officers that can be selected can be:Chief Executive Officer (CEO)Chief Organizing Officer (COO)Chief Financial Officer (CFO)Presidents/ Vice Presidents
The role of the Officers is the day to day operation of the corporation on behalf of the Board of Directors.
HOW LARGE CORPORATIONS ARE ORGANIZEDThe Presidents/ Vice Presidents of a
Corporation are hired by the officers Officers that can be hired can be:
President of International MarketsPresident of US Operations Vice President of Communications Vice President of Travel
The role of the Presidents/ Vice Presidents is a more focused/ specialized day to day operation of the corporation on behalf of the Officers of the corporation.
HOW LARGE CORPORATIONS ARE ORGANIZED
The Managers of a Corporation are hired by the Presidents/ Vice Presidents of a corporation
Managers that can be hired can be:Manager of Eastern European Regional SalesManager of US Operations Manager of Internet Communications Manager of Game Stop in Lyndhurst, NJ
The role of the managers is the overall supervision of workers on the day to day/ basic operations of the corporation for the President/ Vice Presidents.
Form of Business
Advantages Disadvantages
Corporation
87% of the Business Generated
in This Country
• Limited Liability
• Unlimited Life
• Ease of Transfer
ADVANTAGES OF THE CORPORATION Limited Liability
Because the corporation is legally separated from those who own it, the shareholders cannot be held liable for its debts.
Therefore if the business fails, the most money that a shareholder can lose is limited to what they paid for the stock
So corporations are known as “Incorporated”/ “INC” in the US and “Limited” in the United Kingdom (Great Britain)
This limited liability is also another reason why people feel free to invest in corporations
ADVANTAGES OF THE CORPORATION Unlimited Life
Unlike SP’s or Partnerships, when owners of a corporation withdraw (sell their stocks), or die, corporations can go on forever.
This also makes it easier for corporations to borrow money for long periods of time (major loans from banks)
Ease of Transfer Buying in or selling out of a corporation is
relatively easyTo buy, all one needs to do is find
someone with stock to sellTo sell, all one needs to do is find a buyer
for the shares that one owns.
Form of Business
Advantages Disadvantages
Corporation
87% of the Business Generated
in This Country
• Limited Liability
• Unlimited Life
• Ease of Transfer
• Difficulty and Expense of Organizing
• Double Taxation
DISADVANTAGES OF THE CORPORATION
Difficulty and Expense of Organizing Organizing and operating a corporation is a complex process
It usually requires the services of lawyers and accountants, which are services that could cost hundreds of thousands of dollars.
Double Taxation One of the reasons why people buy stocks are
dividends, which are profits distributed to shareholders.
Dividends are subject to personal income taxes.Then, after those dividends are taxed, the
corporation itself pays “Corporate Income Taxes”
DISADVANTAGES OF THE CORPORATION
Double Taxation Many critics argue that double
taxation is unfair
One way around this double taxation is the newer “S Corporation” companies can file to create for with the Federal Government
S CORPORATIONS
A business organization which allows the owners of corporations with 100 or fewer stockholders to be taxed as though they were SP’s or P’s
Advantages: Limited Liability, Unlimited Life, Ease of Transfer, and NO DOUBLE TAXATION
Disadvantages include: Difficulty and expense of formation
LIMITED LIABILITY COMPANY (LLC) The newest form of business organization. LLCs combine advantages and the
disadvantages of Sole Proprietorships, Partnerships, and Corporations
“Members” are not personally liable for debts and LLC’s can sue or be sued as a company
Advantages: Limited Liability, Easier to Form, and NO DOUBLE TAXATION
Disadvantages include: Life may be limited, and ownership could be difficult to transfer
The advantages of LLC’s make it the fastest growing form of small business ownership in the US Today.
OTHER FORMS OF BUSINESS ORGANIZATION
Government-Owned CorporationsInstead of private owners, the government
owns these for profit companies.Examples include : The New Jersey Turnpike
(State) and Tennessee River Authority (Federal)
However, many of these companies have moved towards Privatization
Privatization is the transformation of publicly run businesses into privately operated and owned ones.
OTHER FORMS OF BUSINESS ORGANIZATION
Non-for-Profits Corporations Unlike businesses that distribute profits
to their owners, any money earned beyond costs of the organizations are put back into the Non-For-Profits Corporation’s goals, missions, or mission statement
Examples include: The American Red Cross, Boy Scouts of America, Girl Scouts of America, the United Way, Little League International, ETC
OTHER FORMS OF BUSINESS ORGANIZATION
Cooperatives (Co-Op’s) Cooperatives are associations of individuals or organizations.
Co-op “members” band together to buy or sell more efficiently than they could as individuals.
OTHER FORMS OF BUSINESS ORGANIZATION
EXAMPLES OF COOPERATIVES
Consumer Cooperative- is a retail business owned by some or all of its customers. The “Members” of this cooperative are the only ones who can buy from this store
Examples include: Costco, BJ’s, and…
OTHER FORMS OF BUSINESS ORGANIZATION
EXAMPLES OF COOPERATIVES
Producer Cooperatives- organizations of producers who cooperate in buying supplies and equipment and in marketing their products EXAMPLES INCLUDE: Sunkist Oranges, Blue Diamond Nuts, Alaska Gold Brand (Seafood)
Cooperative Apartment Building- is run by a corporation whose capital stock is owned by its tenants . Any profits and tax benefits help defray the cost of the apartments of the owners
