CHAPTER 8 – TYPES OF
BUSINESS ORGANIZATIONS
SECTION 1 – SOLE PROPRIETORSHIPS
 Characteristics of Sole Proprietorships (single person owned business)
 Every business begins with a person who has an idea about how to earn money and the
drive to follow through on the idea and to create a business organization
 The purpose of a business organization is to earn a profit by producing the goods and
services that best meet consumers’ wants and needs
 Business organizations provide jobs and income that can be used for spending and
saving – they also pay taxes that help finance government services
ADVANTAGES OF SOLE PROPRIETORSHIPS
 Easy to Open or Close
 Easy to Open - needs funding, a license, a site permit, and a legally registered name
 Easy to Close – be sure all bills are paid and close the business
 Few Regulations
 Lightly regulated (i.e. must locate his store in certain locations and must treat
employees according to various labor laws
 Freedom and Control
 Owner makes all the decisions
 Owner Keeps Profits
 Owner gets to keep all the profits the business earns
DISADVANTAGES OF SOLE PROPRIETORSHIPS
 Limited Funds
 Owner is the only one putting in the money resources to keep the business open and
prosper
 Limited Life
 A situation where a business closes if the owner dies, retires, or leaves for some other
reason
 Unlimited Liability
 A business owners is responsible for all business’s losses and debts
SECTION 2 – FORMS OF PARTNERSHIPS
 Partnership – a business co-owned by two or more partners who agree on how
responsibilities, profits, and losses of that business are divided
 General Partnership – partners share management of the business and each one is liable
for all business debts and losses
 Limited Partnership – at least one partner is not involved in the day-to-day running of
business and is liable only for the funds he/she has invested
 Limited Liability Partnership (LLP) – all partners are limited partners and not
responsible for the debts and other liabilities of other partners
ADVANTAGES OF PARTNERSHIPS
 Easy to Open and Close
 Easy to Open - needs funding, a license, a site permit, and a legally registered name
 Easy to Close – be sure all bills are paid and close the business
 Few Regulations
 Lightly regulated (i.e. must locate his store in certain locations and must treat employees
according to various labor laws
 Access to Resources
 With more than one owner, easier to obtain resources to run the business (i.e. loans from
banks)
 Joint Decision Making
 Each partner brings their own particular perspective to the process, which results in better
decisions being made for the business
 Specialization
 Each partner brings specific skills to the business
DISADVANTAGES OF PARTNERSHIPS
 Unlimited Liability
 Both business owners are responsible for all business’s losses and debts
 Potential for Conflict
 Having more than one decision maker can often lead to disagreements between
partners which can lead to the closing of the business
 Limited Life
 A situation where a business closes if the owner dies, retires, or leaves for some other
reason
SECTION 3 – CORPORATIONS, MERGERS, MULTINATIONALS
 Corporation - A business owned by stockholders, who own the rights to the
company’s profits but face limited liability for the company’s debts and losses
 Characteristics of Corporations
 Owned by stockholders
 Stockholders earn dividends (profit)
 Limited liability
ADVANTAGES OF CORPORATIONS
 Access to Resources
 Loans from banks, selling more stock, issuing bonds
 Professional Managers
 Chief Executive Officer
 Chief Operations Officer
 Hire managers with strong backgrounds in finance and sales as company treasurer and vice
president for sales
 Limited Liability
 A business owner’s liability for debts and losses of the business are limited
 Stockholders are only responsible for the money they put in the company, not the whole
company
 Unlimited Life
 A corporation continues to exist even after an owner dies, leaves the business, or transfers
his/her ownership
DISADVANTAGES OF CORPORATIONS
 Start-Up Costs and Effort
 Setting up a corporation is more time-consuming, difficult, and expensive
 Hire a law firm to help start up the corporation
 Heavy Regulations
 Must prepare annual reports for the Securities and Exchange Commission (SEC), a
government agency that oversees the sale of stocks
 Prepare and issue quarterly reports for their stockholders
 Double Taxation
 Taxes on the profits that the corporation must pay
 Stockholders pay a tax on their dividends
 Loss of Control
 Founders, owners, and directors have a major voice in deciding the direction that the
corporation goes
BUSINESS CONSOLIDATION
 Horizontal Merger – the
combining of two ore more
companies that produce the
same product or similar products
 Vertical Merger – the combining
of companies involved in
different steps of producing or
marketing a product
 Conglomerate – a business composed of several companies, each one producing
unrelated goods or services
 Multinational Corporation – large corporation with branches in several countries
SECTION 4 – FRANCHISES, CO-OPS, AND NONPROFITS
 Franchise – a business that licenses the right to sell its products in a particular area
 Advantages
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Owner has a level of independence he/she did not have in their job
Provide good training in running the business
Provide proven products
Relatively low cost
Franchiser would pay for national or regional advertising that would bring in customers
 Disadvantages
 Invent a lot of money with no assurance of success in the business
 Share some of the profits with the franchiser
 No control over some aspects of the business
COOPERATIVES AND NONPROFITS
 Cooperative – business operated for the shared benefit of the owners, who also
are its customers
 Consumer – consumer or purchasing co-ops can be small organizations (i.e. small
organic food cooperative, giant warehouse clubs) that require a membership fee and
keep prices low by offering discounts on large volumes of products/services
 Service – service co-ops are business organizations (i.e. credit unions) that offer their
members a service
 Producer – producer co-ops are mainly owned and operated by the producers of
agricultural products that join together to ensure cheaper, more efficient processing or
better marketing of their products
 Nonprofit Organization – business that aims to benefit society, not to make a
profit