Business Organizations

SOLE PROPRIETORSHIPS,
PARTNERSHIPS,
CORPORATIONS &
OTHER BUSINESS STRUCTURES
Business Organizations

Business Organizations
A business organization is an establishment
formed to carry on commercial enterprise

Types of Business Organizations
Three main types of businesses:
 Sole Proprietorship
 Partnership
 Corporation
There are several forms of partnerships and
corporations.
The biggest difference between all of these types of
business organizations is liability (who is responsible
for the business’s debts).

Sole Proprietorships
Sole proprietorships are the most
common form of business
organization.
Most sole proprietorships are
small. All together, sole
proprietorships generate only
about 6 percent of all United
States sales.
A sole proprietorshipsole proprietorship is a business owned and
managed by a single individual.

Characteristics of Proprietorships
Most sole proprietorships earn modest incomes.
Many proprietors run their businesses part-time.

Advantages of Sole Proprietorships
Ease of Start-Up
 With a small amount of paperwork
and legal expenses, just about
anyone can start a sole
proprietorship.
Relatively Few Regulations
 A proprietorship is the least-
regulated form of business
organization.
Full Control
 Owners of sole proprietorships can
run their businesses as they wish.
They are their own boss
Sole Receiver of Profit
 After paying taxes, the owner of
sole proprietorship keeps all the
profits.
Easy to Discontinue
 Besides paying off legal
obligations, no other legal
obligations need to be met to stop
doing business.
Does not pay separate business
income tax
 Not recognized as a separate legal
entity. Owner pays only personal
income tax on profits.
Sole proprietorships offer their owners many advantages:

The biggest disadvantage of sole proprietorships is
unlimited personal liability. LiabilityLiability is the legally
bound obligation to pay debts.
Disadvantages of Sole Proprietorships
Difficult to raise financial capital
 Personal financial resources available
is limited and banks usually don’t like
to loan money to new or very small
businesses.
Difficult to raise human capital
 Difficulty of attracting qualified
employees because of limited
financial capital, may not be able to
pay competing wages.
Proprietor often lacks
management experience
Size and Efficiency
 Because of limited capital, the
proprietor may not be able to hire
enough personnel or stock enough
inventory to operate business
efficiently.
Sole proprietorships also lack
permanence.
 Whenever an owner closes shop due
to illness, retirement, or any other
reason, the business ceases to exist.

Partnerships
A partnershippartnership is a business jointly owned
by two or more people

Types of Partnerships
Partnerships fall into three categories:
General Partnership
 Partners share equally in both responsibility and
liability.
Limited Partnership
 Only one partner is required to be a general partner,
or to have unlimited personal liability for the firm.
Limited Liability Partnership
 All partners are limited partners.

Advantages of Partnerships
Partnerships offer entrepreneurs many benefits.
1. Ease of Start-Up
Partnerships are easy to establish. There is no required partnership
agreement, but it is recommended that partners develop articles of
partnership.
2. Shared Decision Making and Specialization
In a successful partnership, each partner brings different strengths and
skills to the business.
3. Larger Pool of Capital = Human Capital
Each partner's assets, or money and other valuables, improve the firm's
ability to borrow funds for operations or expansion and attract top talent.
4. Taxation
Individual partners are subject to taxes, but the business itself does not
have to pay taxes.

Disadvantages of Partnerships
Unless the partnership is a limited liability
partnership, at least one partner has
unlimited liability.
General partners are bound by each other’s
actions.
Partnerships also have the potential for
conflict. Partners need to ensure that they
agree about work habits, goals, management
styles, ethics, and general business
philosophies.
Has limited life – when a partner dies or
leaves, the partnership must be dissolved and
re-organized.

Corporations
 Corporations are owned by individual
stockholders.
 Stocks, or shares, represent a stockholder’s
portion of ownership of a corporation.
 A corporation which issues stock to a
limited a number of people is known as a
closely held corporation.
 A publicly held corporation buys and sells
its stock on the open market.
A corporation is a form of business organization
recognized by law as a separate legal entity having
all the rights of an individual.

Characteristics of Corporations
Must file a chartercharter – a government document
that gives permission to create a corporation.
 States the name of the corporation, address,
purpose of the business, and other features of the
business.
 Charter also specifies the number of shares of
stock, or ownership certificates in the firm.
Stocks are sold to investors, called
stockholdersstockholders.
The money is used to set up the corporation.
If the corporation is profitable, it may
eventually pay dividendsdividends – a check
representing a portion of profits.

Characteristics of Corporations: Stock
Common StockCommon Stock
 Represents basic ownership of a
corporation
 The value of one share of stock is
determined by many factors
pertaining to the company’s
overall financial health and
future production possibilities
 1 share = 1 vote for each share of
stock to elect board of directors
 Board members direct the corporation’s business by setting
broad policies and goals.

Characteristics of Corporations: Stock
Preferred StockPreferred Stock
 Represents non-voting
ownership shares of the
corporation.
 These stockholders
receive their dividends
before common
stockholders.
 If corporation goes out of business and if some property and
funds remain after all debts are settled, preferred
stockholders get their investment back before common
stockholders.

Advantages of Incorporation
Advantages for the Stockholders
 Individual investors do not carry
responsibility for the
corporation’s actions.
 Shares of stock are transferable,
which means that stockholders
can sell their stock to others for
money.
Advantages for the Corporation
 Corporations have potential for
more growth than other
business forms.
 Corporations can borrow
money by selling bonds.
 Corporations can hire the best
available labor to create and
market the best services or
goods possible.
 Corporations have long lives.

Disadvantages of Incorporation
Corporations are not without their disadvantages,
including:
 Difficulty and Expense of Start-Up
Corporate charters can be expensive and time consuming to establish.
A state license, known as a certificate of incorporation, must be
obtained.
 Double Taxation
Corporations must pay taxes on their income. Owners also pay taxes
on dividends, or the portion of the corporate profits paid to them.
 Loss of Control
Managers and boards of directors, not owners, manage corporations.
 More Regulation
Corporations face more regulations than other kinds of business
organizations.

Corporate Combinations
Horizontal mergers combine two or
more firms competing in the same
market with the same good or
service.
Vertical mergers combine two or
more firms involved in different
stages of producing the same good or
service.
A conglomerate is a business
combination merging more than
three businesses that make unrelated
products.

Multinational corporations (MNCs) are large
corporations headquartered in one country that have
subsidiaries throughout the world.
Multinationals
Advantages of MNCs
 Multinationals benefit
consumers by offering products
worldwide. They also spread
new technologies and
production methods across the
globe.
Disadvantages of MNCs
 Some people feel that MNCs
unduly influence culture and
politics where they operate.
Critics of multinationals are
concerned about wages and
working conditions provided by
MNCs in foreign countries.

A business franchisebusiness franchise is a semi-independent business
that pays fees to a parent company in return for the
exclusive right to sell a certain product or service
in a given area.
Business Franchises
 Franchisers develop products and
business systems, then local
franchise owners help to produce
and sell those products.
 Franchises allow owners a degree
of control, as well as support from
the parent company.

Advantages and Disadvantages of
Business Franchises
Advantages
• Management training and
support
• Standardized quality
• National advertising programs
• Financial assistance
• Centralized buying power
Disadvantages
• High franchising fees and
royalties
• Strict operating standards
• Purchasing restrictions
• Limited product line

A cooperativecooperative is a business organization owned and
operated by a group of individuals for their shared benefit.
Cooperatives
 Consumer Cooperatives
 Retail outlets owned and operated by consumers
are called consumer cooperatives, or purchasing
cooperatives. Consumer cooperatives sell their
goods to their members at reduced prices.
 Service Cooperatives
 Cooperatives that provide a service, rather than
goods, are called service cooperatives.
 Producer Cooperatives
 Producer cooperatives are agricultural
marketing cooperatives that help members sell
their products.

Nonprofit Organizations
Professional Organizations
Professional organizations work
to improve the image, working
conditions, and skill levels of
people in particular occupations.
Business Associations
Business associations promote the
business interests of a city, state,
or other geographical area, or of a
group of similar businesses.
Trade Associations
Nonprofit organizations that
promote the interests of
particular industries are called
trade associations.
Labor Unions
A labor union is an organized
group of workers whose aim is to
improve working conditions,
hours, wages, and fringe benefits.
Institutions that function like business organizations, but do not
operate for profits are nonprofit organizations. Nonprofit organizations
are exempt from federal income taxes.

Have You Been Paying Attention?
QUIZ TIME!
Close your notes!
Take out a blank sheet of paper, and number it 1 to 8.
Next to each number, write the letter of the correct
answer for each of the following questions.
No, you can’t use the notes you just took! 

Business Organization Quiz
1. Any establishment formed to carry on commercial enterprises is a
(a) partnership.
(b) business organization.
(c) sole proprietorship.
(d) corporation.
2. Sole proprietorships
(a) are complicated to establish.
(b) make up about 6 percent of all businesses.
(c) are the most common form of business in the United States.
(d) offer owners little control over operations.

3. What advantage does a partnership have over a sole proprietorship?
(a) The responsibility for the business is shared.
(b) The business is easy to start up.
(c) The partners are not responsible for the business debts.
(d) The business is easy to sell.
4. How is a general partnership organized?
(a) Every partner shares equally in both responsibility and liability.
(b) The doctors, lawyers, or accountants who form a general partnership hire
others to run the partnership.
(c) No partner is responsible for the debts of the partnership beyond his or her
investment.
(d) Only one partner is responsible for the debts of the partnership.

5. All of the following are advantages of incorporation EXCEPT
(a) the responsibility for the business is shared
(b) capital is easier to raise than in other business forms
(c) corporations face double taxation
(d) corporations have more potential for growth
6. A horizontal merger
(a) combines two or more firms involved in different stages of producing the
same good or service.
(b) combines two or more partnerships into a larger partnership.
(c) combines two or more firms competing in the same market with the same
good or service.
(d) combines more than three businesses producing unrelated goods.

7. A business franchise
(a) attempts to improve the image and working conditions of people in a
particular occupation.
(b) operates without the aim of profit.
(c) is a semi-independent business tied to a parent company.
(d) is not required to pay income taxes.
8. Consumer cooperatives
(a) are owned and operated by consumers.
(b) provide a service, rather than a good.
(c) help members sell their agricultural products.
(d) pay no income tax.

Check Your Answers!
Grade your own paper using the answers on the
following slides. When you’re done, hand in your
paper to Ms. Ross-Raymond!
One point per item.

Answers!
Grade Your Own, Then Turn It In!
1. Any establishment formed to carry on commercial enterprises is a
(a) partnership.
(b) business organization.
(c) sole proprietorship.
(d) corporation.
2. Sole proprietorships
(a) are complicated to establish.
(b) make up about 6 percent of all businesses.
(c) are the most common form of business in the United States.
(d) offer owners little control over operations.

Answers
3. What advantage does a partnership have over a sole proprietorship?
(a) The responsibility for the business is shared.
(b) The business is easy to start up.
(c) The partners are not responsible for the business debts.
(d) The business is easy to sell.
4. How is a general partnership organized?
(a) Every partner shares equally in both responsibility and liability
(b) The doctors, lawyers, or accountants who form a general partnership hire
others to run the partnership
(c) No partner is responsible for the debts of the partnership beyond his or her
investment
(d) Only one partner is responsible for the debts of the partnership

Answers
5. All of the following are advantages of incorporation EXCEPT
(a) the responsibility for the business is shared
(b) capital is easier to raise than in other business forms
(c) corporations face double taxation
(d) corporations have more potential for growth
6. A horizontal merger
(a) combines two or more firms involved in different stages of producing the
same good or service.
(b) combines two or more partnerships into a larger partnership.
(c) combines two or more firms competing in the same market with the same
good or service.
(d) combines more than three businesses producing unrelated goods.

Answers
7. A business franchise
(a) attempts to improve the image and working conditions of people in a
particular occupation.
(b) operates without the aim of profit.
(c) is a semi-independent business tied to a parent company.
(d) is not required to pay income taxes.
8. Consumer cooperatives
(a) are owned and operated by consumers.
(b) provide a service, rather than a good.
(c) help members sell their agricultural products.
(d) pay no income tax.

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