Chapter 3 Section 1 Business Organizations Sole Proprietorships
Chapter 3 Section 1 Business Organizations Sole Proprietorships and Partnerships
Economic Institutions • Persons and organizations that use or represent the factors of production • Business Organizations – profit seeking enterprises that link resources with consumers
Sole Proprietorship – 1 Person • Formation: set up operations and begin; no formal requirements to start the business • Ex: Lemonade Stand • Ex: Making jewelry and selling it on Ebay
Sole Proprietorship – 1 Person STRENGTHS 1. 2. 3. 4. Easy to Start Easy to Manage Keep all the profits No business income tax – SP pays ordinary income tax (just like getting a paycheck) 5. Psychological – freedom of being your own boss 6. Easy to end – stop offering G/S for sale
Sole Proprietorship – 1 Person WEAKNESSES 1. UNLIMITED LIABILITY – risk personal assets 2. Difficult to raise financial capital – not easy to get a loan from a bank or investors 3. Lack of efficiency due to size – need enough labor and inventory to operate efficiently 4. Limited Management Experience 5. Difficult to attract employees because of lack of benefits, smaller salaries offered, etc. 6. Limited Life – business dies with owner
Partnerships – 2 or more people • General Partnership: all partners are responsible for the management and financial obligations of the business; ALL GPs SHARE UNLIMITED LIABILITY and are responsible for acts of Partners • Limited Partnership: at least one partner (the LP) is NOT active in the daily running of the business; LIMITE PARTNER HAS LIMITED LIABILITY (to the extent of financial investment in the company)
Partnerships – 2 or more people • EX: Doctors, Lawyers, Accountants • Formation: legal contract often called Articles of Partnership or Partnership Agreement • Contract Defines Terms of Partnership: – Identify GPs and any LPs – Explain the division of profits, losses – Define responsibility within the business – Explain how to add partners to or remove them from the partnership
Partnerships – 2 or more people STRENGTHS 1. Easy to establish – create an agreement 2. Ease of management – multiple people with ideas and expertise 3. No business income tax – Ps pays ordinary income tax (just like getting a paycheck) 4. Easier to attract financial capital – more people from whom to collect 5. Better efficiency than an SP – more people 6. Easier to attract employees compared to SP – better benefits for larger organizations
Partnerships – 2 or more people WEAKNESSES 1. Each partner is fully responsible for the acts of the others – UNLIMITED LIABILITY as to GPs (limited liability as to LPs) 2. Limited Life – partnership dies with you; but easy to overcome by adding new partner 3. Potential for CONFLICT between the partners (written Article of partnership can help deal with this problem); choose wisely!!!
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