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)