Business Organizations

1. Sole Proprietorship - A business owned and operated by one person.

Oldest, simplest, most common type Who owns SP’s? (Internet advantages)Advantages of Sole Proprietorships:

1. Ease of start up2. Few regulations3. Full control4. Exclusive right to all profits

Sole Proprietorships

1. Easy Start Up— Require small amount of money Can set up in a short amount of time

2. Few Regulations Business License Site Permit (zoning laws) Register business name Obtain federal/state tax ID

Sole Proprietorships

3. Full Control - You maintain complete control and can make fast and flexible decisions.Minimal paperwork, meetings, depends on

YOU!

4. Profit - The owner (YOU) keeps all the profits.

Sole Proprietorships

Disadvantages:

1. Unlimited Personal Liability

2. Limited Access to Resources

3. Lack of Permanence

Disadvantages of S.P.

1. Unlimited Liability –

YOU are personally responsible for all business debts.

YOU can also be sued personally for anything if the business is taken to court.

Disadvantages – Sole Proprietorships

2. Limited Access to Resources - Sole responsibility - YOU are

responsible for ALL aspects of running your business. But are you an expert at all aspects of running a business?

- Limited Growth Potential – Difficult to expand or improve the business because banks are reluctant to give loans. Collateral—Anything of value you pledge as

security for a loan.

Disadvantages of SP

4. Lack of Longevity - The length of a firm’s life or the amount of time the business operates.Ex. Your health / lifespanEx. High turnoverEx. You lose interest in the businessEx. Your competence

PartnershipsPartnership—A business that is owned and controlled by two or more people.

Ex. Small retail stores, restaurants, doctors, lawyers

General—Partners enjoy equal decision making authority.

Limited—Partners who provide capital($) but do not play an active role in running the company. Liability is limited between partners.

Limited Liability Partnership – similar to general except partners not responsible for each other’s mistakes (limited liability between partners)

Advantages of Partnerships

Advantages of Partnerships:1. Ease of start-up

2. Financial Advantages

3. Specialization / Shared decision making

Advantages of Partnerships

1. Easy start upFew government regulationsCosts tend to be lowPartners usually develop a partnership

contract but not required. Can distribute profits and responsibilities by choice.

Advantages of Partnerships

2. Financial Advantages Shared Assets: Partners can pool assets to start

the business or make capital purchases. Improved ability to raise capital – Banks are

more likely to lend to partnerships because they have an increased amount of collateral.

Shared Losses - The sharing of losses may enable a partnership to survive a situation that might cause a sole proprietorship to fail.

Partnerships - Advantages

3. Shared Decision Making Specialization— Specific business duties can

be assigned to different partners based on expertise and individual talents.

Ex. One good in sales—other good in accounting

Minimize mistakes - Partners can minimize mistakes by consulting with each other.

Flexibility – Can go on vacation, illness

Disadvantages of Partnerships

1. Unlimited Liability - Each partner is personally responsible for debts incurred by the business. General partners can lose everything they own! If one partner refuses or is unable to pay

for his share, then the other partners are still liable for the total debt.

Other partners can lose based on the mistakes of one

Disadvantages of Partnerships

2. Potential Conflicts – Official partnership agreements deal with ownership percentages and technicalities such as profit and loss.

However, other factors play an even bigger role…

Work habits, personalities, management styles, ethics, etc…

Disadvantages of Partnerships

3. Lack of Permanence - Life of the business is dependent on the willingness and ability of the partners to continue to work together.One partner cannot remain (die/illness) or

decides that they no longer want to work in the partnership. What are the options?

Find a new partner, buy the partner out, or close the business.

Franchises

Franchise - A semi-independent business that pays fees to a parent company. In return, the business is granted the exclusive right to sell a certain product or service in a given area.

Examples: Subway, Jiffy Lube, McDonalds, Palm Beach Tan, Home Again Senior Care

Franchise Advantages

Advantages

1. Management training and support

2. Standardized quality

3. National advertising programs

4. Financial assistance

5. Centralized buying power

Franchise Disadvantages

Disadvantages

1. High franchising fees and royalties

2. Strict operating standards

3. Purchasing restrictions

4. Limited product line

CorporationsCorporations— Companies that are formed as legally distinct from their owners and are treated as if they were individuals.Can: Hire workers, make contracts, pay

taxes, sue and be sued, make & sell products.

Forming a Corporation

1. Must apply for a state license known as the: articles of incorporation. Includes: name and purpose of corp. Address and headquarters Amount of $ it expects to raise Names and addresses of officers Length of time expected to exist License granted is called: corporate charter

Corporate StructureStructure:Owners/ShareholdersBoard of DirectorsCorporate OfficersVice PresidentsDepartment HeadsEmployees

Corporate FinancesStock— A certificate of ownership of the firm.Stockholders – Individuals that own sharesShares - Portions of stock (certificates) issued.Dividends - Profits paid to shareholders.Common Stock - Allowed to vote. May or may not offer dividendsPreferred Stock - Guaranteed dividends; paid before common stock. No voting rights

Corporate FinancesCorporate Bond—Certificate issued by a corporation in exchange for money borrowed.

Principal—The actual amount of money borrowed. Ex. Buy $10,000 @5% interest Principal=$10,000 X 5%= $500 per year income

Interest—Amount borrower must pay for the use of the principal.

Advantages of Corporations

Advantages to stockholders1. Limited Liability – Can lose only the

amount they invested in the business. No personal assets can be touched.

2. Transferable - Can sell their shares at any time

Advantages of Corporations

Advantages for the Corporation:

1. Capital can be raised easily (bonds, issuing shares)

2. Separation of ownership from management. - Owners need no skills. Can hire experts.3. Longevity – Businesses can live indefinitely since

ownership is transferable and owners are not running day to day operations.

Disadvantages of Corporations

1. Difficulty and expense of startup- Corporate charters involve a complicated legal

process

2. Double Taxation

Corporation pays taxes on profits

Corporation pays stockholders dividends

Stockholders pay income tax on dividends

Disadvantages of Corporations

3. Loss of control / Slow decision making process

- Owners have little control of decision making. Corporate officers (management) and/or Board of Directors may make decisions in their own self-interest that do not benefit owners.

- Major corporate decisions are delayed by the

voting process and meeting times of the Board of Directors

Disadvantages of Corporations

4. Government Regulations Have far more and stricter laws

Example – Must file quarterly and annual earnings reports to the SEC (Securities and Exchange Commission)

Limited Liability Corporation LLC

Advantages Limited Liability

No Double Taxation

Disadvantages Almost none

Most popular form of small businesses now