Business

Organizations
Legal Forms of Business
Organizations
• Sole Proprietorship
– Business owned by one person and operated for his
or her own profit
– Strengths
• Owner receives all profits and sustains all losses
• Low organizational costs
• Income included and taxed on proprietor’s
personal tax return
• Independence
• Secrecy
• Ease of dissolution
Legal Forms of Business
Organizations
• Sole Proprietorship
– Weakness
• Owner has unlimited liability
– Unlimited liability
» The condition of a sole proprietorship (or
general partnership) allowing the owner’s
total wealth to be taken to satisfy creditors
• Limited fund raising power tends to inhibit
growth
• Proprietor must be jack-of-all trades
• Difficult to give employees long-run career
opportunities
• Lacks continuity when proprietor dies
Legal Forms of Business
Organizations
• Partnership
– A business owned by two or more people and
operated for profit
– Most partnerships are established by a written
contract known as Articles of Partnership
– General Partnership
• All partners have limited liability
– Limited Partnership
• At least one (the general partner) has unlimited
liability
• The limited partners cannot take an active role in
the firm’s management (passive investors)
Legal Forms of Business
Organizations
• Partnership
– Limited Liability Partnership
• All LLP have limited liability
• All are liable for their own acts of malpractice
but not for those of other partners
• Taxed as partnership
– Strengths
• Can raise more funds than sole proprietorships
• Borrowing power enhanced by more owners
• More available brain power and managerial skill
• Income included and taxed on partner’s personal
tax return
Legal Forms of Business
Organizations
• Partnership
– Weaknesses
• Owners have unlimited liability and may have to
cover debts of other partners
• Partnership is dissolved when a partner dies
• Difficult to liquidate or transfer partnership
• Corporation
– An artificial being created by law (often called a
“legal entity”)
– Strengths
• Owners have limited liability which guarantees
that they cannot lose more than they invested
Legal Forms of Business
Organizations
• Corporation
– Strengths
• Can achieve large size via sale of ownership
(stock)
• Ownership (stock is readily transferable
• Long life (50 years)
• Can hire professional managers
• Has better access to financing
• Can offer attractive retirement plans
Legal Forms of Business
Organizations
• Corporation
– Weaknesses
• Taxes generally higher because corporate
income is taxed, and dividends paid to owners
are also taxed at a maximum of 15% rate
• More expensive to organize than other business
forms
• Subject to greater government regulation
• Lacks secrecy because stockholders must
receive financial reports