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)