i Stockphoto com Rich Yasick Forms of Business

Learning Goals 1 What are the advantages and disadvantages of the sole proprietorship form of business organization? 2 What are the advantages of operating as a partnership, and what downside risks should partners consider? 3 How does the corporate structure provide advantages and disadvantages to a company, and what are the major types of corporations? 2

Business Ownership § Sole proprietorships § Partnerships § Corporations 3

Sole Proprietorships 1 1 What are the advantages and disadvantages of the sole proprietorship form of business organization? 4

Sole Proprietorships sole proprietorship A business owned , operated, managed and often financed by one individual; the business and the owner are one and the same in the eyes of the law 1 5

Sole Proprietorships Disadvantages Advantages § § § 1 Easy and inexpensive to form Profits go to the owner Direct control of the business Freedom from government regulations No special taxation Ease of dissolution § § § § Unlimited liability Difficulty raising capital Limited managerial expertise Trouble finding qualified employees Personal time commitment Unstable business life Losses are owner’s responsibility 6

CONCEPT check What is a sole proprietorship? Why is this a popular form of business organization? What are the drawbacks to being a sole proprietor? 1 7

Partnerships 2 2 What are the advantages of operating as a partnership, and what downside risks should partners consider? 8

Partnerships partnership An association of two or more individuals who agree to operate a business together for profit. limited partnerships have at least one general partner who controls the company's day-to-day operations and is personally liable for business debts, a limited partner's personal liability is capped at the amount of his or her investment 2 9

Partnerships Advantages § § § 2 Ease of formation Availability of capital Diversity of skills and expertise Flexibility No special taxes Relative freedom from government control Disadvantages § § Unlimited liability Potential for conflicts between partners Complexity of profit-sharing Difficulty exiting or dissolving partnership 10

CONCEPT check How does a partnership differ from a sole proprietorship? Describe three main types of partnerships and explain the difference between a limited partner and a general partner. What are the main advantages and disadvantages of a partnership? 2 11

Corporations 3 3 How does the corporate structure provide advantages and disadvantages to a company, and what are the major types of corporations? 12

Corporations corporation A legal entity with an existence and life separate from its owners, who are not personally liable for the entity’s debts. A corporation is chartered by the state in which it is formed and can own property, enter into contracts, sue and be sued, and engage in business operations under the terms of its charter. 3 13

The 10 Largest U. S. Corporations 1. Wal-Mart Stores 2. Exxon. Mobil 3. Chevron Texaco 4. General Motors 5. Conoco. Phillips 6. General Electric 7. Ford Motor 8. Citigroup 9. Bank of America Corp. 3 Ranked by 2007 Sales Source: “The 2008 Fortune 500, ” Fortune, http: //money. cnn. com/magazines/fortune (April 2008) ©Time Inc. All rights reserved. 10. AT&T 14

Articles of Incorporation § Name of corporation § Company’s goals § Types of stock and number of shares issued § Life of the corporation § Minimum investment by owners § Methods for transferring shares § Address of the corporate office § Names and addresses of the first board of directors 3 Exhibit 4. 4 15

Corporations Advantages § § § 3 Limited liability Ease of transferring ownership Unlimited life Tax deductions Ability to attract financing Disadvantages § § § Double taxation of profits Cost and complexity of formation More government restrictions 16

Types of Corporations 3 C Corporation A conventional or basic corporate form of organization S Corporation A hybrid entity that is organized like a corporation, but taxed like a partnership Limited Liability Company (LLC) A hybrid organization that offers the same liability protection as a corporation but may be taxed as either a partnership or a corporation 17

CONCEPT check What is a corporation? Describe how corporations are formed and structured. Summarize the advantages and disadvantages of corporations. Which features contribute to the dominance of corporations in the business world? Why do S corporations and limited liability companies (LLCs) appeal to small businesses? 3 18