Business Organizations. Business Organization Comparison Sole ProprietorshipGeneral Partnership...

Business Organizations

Business Organization Comparison

Sole Proprietorship General Partnership

Limited Partnership

Limited Liability Company (LLC)

Corporation

Formation

Duration

Liability

Management

Raising Capital

Main Advantages

Main Disadvantages

Other Notes

Liability

• Limited-

owner’s responsibility for company’s debt limited to size of investment

vs.

• Unlimited-

owner fully responsible for all losses & debts of business

Sole Proprietorship

• Business owned by one person

• Oldest & most common form of business organization

• Small = easier & less expensive to manage and operate

Sole Proprietorship

• Formation- No state permission required

• Duration- Dependent on sole proprietor

• Liability- Sole proprietor has unlimited liability

• Management- Full control of management and operations

• Raising Capital- Difficult, unless owner contributes own money

Sole Proprietorship

• Advantages:– Simple and inexpensive to create and operate– Receive all profits! – Decisions made quickly, by proprietor,

less complicated– Easier to obtain credit– You did it!!! Successful on your own!

WOOHOO!!!

Sole Proprietorship

• Disadvantages:– Losses not shared– Unlimited liability = personally liable for debts– Make ALL decisions– Lots of responsibility, time consuming &

demanding– Money– Whole business dependent on one person

Partnerships

• 2 or more individuals own

and operate business

• Legally binding agreement– Duties of each partner– Division of profits– Distribution of assets if partnership ends

• General or Limited

General vs. Limited Partnerships

• General-each partner has obligations to the partnership, and each assumes unlimited liability for the partnership's debts.

• Limited-Usually just one general partner. A limited partner doesn’t have obligations to partnership, doesn’t participate in daily operations.

***Role usually nothing more than making an initial capital investment in exchange for a share of the firm's profits.

General Partnership

• Formation- Agreement between people; no state permission required

• Duration- Limited

• Liability- Partners have unlimited liability

• Management- Usually each partner equal voice

• Raising Capital- Contribution from partners, may add more partners

General Partnership

• Advantages:– Simple and inexpensive to create & operate– Efficiency– Easier to get loan (risk shared)

• Disadvantages:– Partners personally liable for business debts– Decision making slow, more complicated

Limited Partnership(Partners not equal)

• Formation- File with state for permission • Duration- Limited• Liability- General Partners=unlimited

liability, Limited Partners=limited liability• Management- General Partners usually

responsible• Raising Capital- Contributions from

partners, possible to sell interest in partnership

Limited Partnership

• Advantages:– Limited personal liability for debts– General partners raise $ without involving

outside investors in business management

• Disadvantages:– More expensive to create than general

partnership– General partners take full liability

Corporation

• Organization owned by many but treated by the law as though it were a person– Own property, pay taxes, make contracts, etc.

• Most important business organization in U.S. (in terms of business done/$$$)

Proportion of Businesses

Proprietorships

Partnerships

Corporations

74.3%

18.6%

7.1%

Proportion of Total Business Revenue

Proprietorships

Partnerships

Corporations90.4%

5.64 %

To Form Corporation

1. Register company with state government-State grants corporate charter=license to operate from that state

2. Sell stock-Common vs. Preferred

3. Elect a Board of Directors-supervises and controls corporation

Corporation

• Formation- File with state for permission

• Duration- Permanent

• Liability- Shareholders not personally liable for debts of business

• Management- Board of Directors, elected by shareholders

• Raising Capital- Shares of stock in corporation or sell debt by issuing bonds

Corporation• Advantages:

– Shareholders make profit ($) with no commitment

– Shareholders have limited liability

– Decisions/responsibilities divided/shared

• Disadvantages:

– Decision-making slow, complicated

– Corporations often taxed twice

– Shareholders invest, but have little to no say in how corporation is run

Franchise

• Contract-franchisor sells right to use name/sell products to another business (franchisee)

• Franchisee pays fee + portion of profits

• Think Dunkin Donuts

• McDonalds or Holiday Inn-advertising– Many fast food restaurants, hotels, gas

stations are franchises

Activity• What form of business organization is

best?

• Why? Reasons it works for the client.Give 2 or more reasons.

• 1 Disadvantage to the business organization you choose.

• How could this be minimized?

Limited Liability Company (LLC)Think Corporations + Partnerships

• Formation- File with state for permission

• Duration- Typically limited to fixed amount of time

• Liability- Members not personally liable for debts of business

• Management- Operating agreement

• Raising Capital- Possible to sell interest

LLC

• Advantages:– Members limited liability for company debts– Members share in operation/management

• Disadvantage:– More expensive to start up (legal fees)