Unit Three: Microeconomics
Types of Businesses
WHAT ARE THE ADVANTAGES
AND DISADVANTAGES OF
EACH?
Sole Proprietorships
Partnerships
Corporations
THREE TYPES OF
BUSINESSES
• Partnerships
• Owned by two or more people, called partners
• Corporations
• Owned by stockholders, those who purchase shares of its
stock
SOLE PROPRIETORSHIPS
• Owned by one person, the proprietor
• Seven out of every 10 businesses is a sole proprietorship
• Common in these industries
•
•
•
•
•
Health care
Real estate
Retail trade
Agriculture
The arts
ADVANTAGES OF A
SOLE PROPRIETORSHIP
1.
Easy and cheap to start up
2.
Ease of decision making
•
•
•
You are your own boss
You don’t need anyone’s approval to try something
new
You can respond rapidly to changing market
conditions
ADVANTAGES OF A SOLE
PROPRIETORSHIP
CONTINUED
3.
Ownership of profits
•
4.
All of the profits belong to YOU!
Tax benefits
•
5.
Your profits are considered part of your ordinary
income
Intrinsic rewards
•
The feeling of accomplishment from building a
successful business
DISADVANTAGES OF A
SOLE PROPRIETORSHIP
1.
Burden of responsibility
•
•
•
2.
All tough decisions are on your shoulders
Employees look to you for guidance
If you are sick or on vacation its still your responsibility
Difficulty raising funds
•
•
Banks may not want to lend money
Many end up funding their start-up with savings or
borrowing from friends and family
DISADVANTAGES OF A
SOLE PROPRIETORSHIP
CONTINUED
3.
Unlimited liability
•
•
Sole proprietors are personally responsible for all the
debts and other obligations of the business
You may have to use your personal wealth (perhaps
even sell your house) to settle or fight a lawsuit
PARTNERSHIPS
• A for-profit business owned by two or
more people
• Only 1 in 10 businesses are partnerships
• Common in these industries
•
•
•
•
•
•
Stores
Restaurants
Contractors
Law firms
Medical practices
Business consulting firms
HOW TO CREATE A
PARTNERSHIP
• Easy to start
•
•
•
•
•
Register the name of the business
Check and conform to regulations
Obtain any necessary licenses and permits
Keep records and prepare tax forms
Create a partnership agreement
• Partnership agreements identify:
• the roles, responsibilities and obligations of the partners
• solutions to what-ifs
• which partners are general partners and which are
limited partners
ADVANTAGES OF A
1.
Larger pool of financing
•
•
2.
PARTNERSHIP
Each partner can contribute funds
Banks are more willing when they can collect from more
than one person
Shared decision making
•
•
3.
Tough decision burden is shared
If one is ill or on vacation, the other can handle the firm
Benefits of specialization
•
Each can work at the tasks he or she is best suited, such as
sales or accounting
DISADVANTAGES OF A
PARTNERSHIP
1.
Unlimited liability for general partners
•
•
2.
Each general partner shares personal responsibility for all the
debts and other obligations of the business
If the business fails, or someone sues the business you will
need to use your personal wealth to pay it back
Disagreement among partners
•
If you don’t agree on a decision, you might argue endlessly
or generate bad feelings
CORPORATIONS
• Corporations are legal entities
• The law treats corporations similar to how it treats people
• They can own property, enter into contracts with people
or other businesses, and bring lawsuits
CREATING A
CORPORATION
• Much more expensive and time consuming than creating a
partnership or sole proprietorship
• One in 5 businesses are corporations
• Complete a corporate charter, or certificate of
incorporation
ADVANTAGES OF A
CORPORATION
1.
Limited liability for stockholders
•
•
2.
Stockholders losses are limited to what they paid to buy
their shares of stock
No one can go after their personal wealth
Ability to raise funds by issuing stock
•
3.
Only corporations can raise money by selling stock
Ability to raise funds by issuing bonds
•
Only corporations can borrow money directly from the
public by issuing and selling bonds
ADVANTAGES OF A
CORPORATION CONTINUED
4.
Rapid growth
If successful, can get large amounts of money quickly
Can take advantage of economies of scale—which
means that the cost per unit falls as output rises, thanks to
major costs being spread over a growing quantity of
output.
Example of economies of scale
•
•
•
•
•
•
Developer spends $5,000 creating a cell phone app
If one person buys the app, the developer’s fixed cost per
unit is $5,000
If 1,000 people buy the app, the developer’s fixed cost per
unit is $5
DISADVANTAGES OF
A CORPORATION
1.
Expensive start-up costs
•
2.
Forming a corporation involves higher legal fees
Low nonmonetary rewards
•
3.
No satisfaction from running your own business
Delays in decision making
•
Layers of decision makers can make it difficult to move
fast as market conditions change
TYPICAL STRUCTURE OF A
CORPORATION
Understanding Corporate Structure
DISADVANTAGES OF
A CORPORATION
CONTINUED
Divided ownership of profits
4.
Corporate profits are divided among stockholders
Decisions about how to spend profits are made by the
corporation’s managers and board of directors
•
•
5.
Tax treatment—Double taxed!
Corporate profits are taxed, then any profits paid to
stockholders are taxed again (as income)
•
6.
More reporting requirements
Corporations face more regulations than other business types
•
•
•
Stricter health, safety, and environmental rules
More closely monitored
Most business
revenues go
to
corporations
Most
businesses
are sole
proprietorship
s
WHAT IS THE ETHICAL AND
SOCIAL RESPONSIBILITY OF
BUSINESS?
“There is one and only one social responsibility of business—to
use its resources and engage in activities designed to increase
its profits so long as it stays within the rules of the game, which
is to say, engages in open and free competition, without
deception or fraud.”
--Milton Friedman
Ted Talks