CHAPTER 8
TYPES OF BUSINESS
STRUCTURES
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How to start an Economic Institution?
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Starting a business requires more than
natural resources, labor, and capital.
An entrepreneur is an individual who is
willing to organize and manage a business
in order to make a profit.
The entrepreneur answers the basic economic
questions about what, how, and for whom a
good or service will be produced.
 He/she assumes ALL the RISK.
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Examples of entrepreneurs?
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Many of the nation’s entrepreneurs became
famous for their ability to organize and manage.
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Andrew Carnegie in steel,
John D. Rockefeller in oil,
Henry Ford in automobiles,
Bill Gates in computers,
Ray Kroc (McDonald’s) in fast foods,
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and Sean Combs or Tim McGraw in music.
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Entrepreneurs often are successful because they
see opportunities where others do not.
People thinking of starting a business should watch
for opportunities and acquire the training that will
increase their chances of success.
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WHAT STRATEGIES DO
ENTREPRENEURS USE?
Entrepreneurs must make many decisions as they
start up new businesses.
 One of the first decisions they face is what form of
business organization best serves their interests.
 A business organization is an establishment formed
to carry on commerce.
 In
other words, a business organization is a company and
these business organizations can be set-up as a:
(1) corporation (private or public)
(2) partnership, or
(3) sole proprietorship
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Corporations
Large and Complex
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CORPORATIONS
Corporations defined:
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The most complex type of business
organization is the corporation.
It is a legal entity or being, owned by individual
stockholders, each of whom faces limited
liability for the firm’s debts.
Stockholders own stock or shares, which
represent their portion of ownership in the
corporation.
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CORPORATIONS
Corporation’s Structure:

A corporation has the following general structure:
Stockholders
(owners of stock)
Board of Directors
(some of the board members ARE stockholder and
some ARE NOT)
CEO
CIO
Regional IT
Managers
CFO
Regional
Warehouse
Managers
Warehouse Managers
Sales Managers
Salesmen
COO
Controller of
Accounting
Customer
Support Regional
Managers
Customer
Support
Managers
CMO
Regional Sales
Managers
Store Managers
Store Employees
Customer Service Representatives
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CORPORATIONS
Corporations raise money through the sale of
stocks and/or bonds:
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Bonds:
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LESS RISK
A bond promises to pay a stated rate of interest over a
stated period of time; it also promises to repay the full
amount borrowed at the end of that time (called a
maturity date)
 Stock:
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MORE RISK because your money is lost if the
company goes bankrupt.
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It is more of a gamble.
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CORPORATIONS
How do Corpporations get money for the
business? They…buy and sell stock!
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STOCK MARKETPLACE
Stock is registered with the Securities and Exchange
Commission (SEC: the protector of investors)
The largest corporations are usually listed on the New
York Stock Exchange (NYSE).
Some stocks for smaller companies many be listed
National Association of Securities Dealers Automated
Quotation (NASDAQ) , AMEX (New York)., or OTCBB
(part of NASD).

A corporation can raise capital to develop/expand by also
selling debt by issuing bonds.
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CORPORATIONS
Other World Exchange Markets
Stocks are bought and sold at financial markets called stock
exchanges, such as the…
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CORPORATIONS
Corporations: Three Types of Corporations:
1.) Private Corporations: Some corporations issue
stock to only employees or family members.
These stockholders cannot trade (or sell) their
stock.
2.) Publicly-traded Corporations: It has many
shareholders who can buy or sell stock on the
open market.
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CORPORATIONS
Three Types of Corporations:
3.) “S”- Corporations: A small corporation that is taxed
like a partnership, but has individual stockholders.
 Corporation pays NO federal tax on its profits, instead the
individual share owners do. Each shareholder is
responsible for paying their share of the taxes (like a LLC).
 Advantage: if the business loses money, the individual
shareholders can write down their personal income,
resulting in less personal taxes paid.
 Advantage: shareholders and employees of an S corporation do not pay Medicare or Social Security taxes
(FICA).
 Requirements: Corporation can’t have more than 75
shareholders.
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CORPORATIONS
Advantages of Corporations:
1.) Very Little Liability: A corporation is defined as an "entity"
because it has a legal identity separate from those of its
owners. A corporation pays taxes, engages in business,
makes contracts, sues other parties, and gets sued by others.
2.) Access to Many Resources: corporations have more access
to physical capital and they have access to human capital.
(well educated business leaders)
3.) Indefinite Life (immortal): a corporation will not cease to
exist if the owner passes, or retires.
4.) Easy to Raise Money: through the sales of stock, a company
can raise money to fund operations.
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CORPORATIONS
Disadvantages of Corporations:
1.) Owner has Little Control: he/she has little control
over the company. They have to listen to the Board
of Directors and the stockholders.
2.) Does NOT React quickly to changes in the market:
corporations are huge bureaucracies and they are
not quick to response to the marketplaces.
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Everything has to be approved by the Board of Directors
(which takes valuable time)
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Partnerships
Two or more owners who split
responsibility of the management of
the company
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PARTNERSHIPS
Advantages of Partnerships:
1.) Shared Decision Making and Specialization: divide
up the work and the costs of the company.
 Able to tap into HUMAN CAPITAL resources.
2.) Combining of Capital: combine the money and
human resources (intelligence) of two in order to get
started.
3.) Not Liable for other partners actions: if one partner
screws up, then the other is not liable for the wrongdoing. (DOES NOT APPLY FOR GENERAL
PARTNERSHIP)
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PARTNERSHIPS
Disadvantages of Partnerships:
1.) Limited Liability: each partner could lose what they
put into the partnership due to another partner’s
actions…
 …so choose your business partners carefully!
2.) Loss of Individual Control: you must share the
decision-making (even in a LP, because the others are
giving you money, you have to listen to their needs)
3.) Disagreements: if a conflict starts, then the business
could suffer because of the disagreement
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Sole Proprietorships
The smallest of them all, but the most
versatile and easiest to start.
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THE TYPES OF BUSINESSES
ORGANIZATIONS
Sole Proprietorships
The Role of Sole Proprietorships:
A sole proprietorship is a business owned and
managed by a single individual.
 That person earns all of the firm's profits and is
responsible for all of the firm's debts.
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This type of firm is by far the most popular in
the United States. According to the Internal
Revenue Service, about 75 PERCENT of all US
businesses are sole proprietorships.
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Most sole proprietorships are small. Why?
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THE TYPES OF BUSINESSES
ORGANIZATIONS
Sole Proprietorships
Advantages of Sole Proprietorships:
1.) Easy to Start: While you need to do more than just hang out a
sign to start your own business, a sole proprietorship is simple
to establish.
 With just a small amount of paperwork and legal expense,
just about anyone can start a sole proprietorship.
 To start a new business, a sole proprietor must meet a small
number of government requirements, which can vary from
city to city and state to state.
1. Name: may use his/her own name as the name of the
business; a sole proprietor must register some business name.
2. Authorization: sole proprietors must obtain a business license.
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INFORMATION NEEDED:
1. Contact Info
2. Number of employees
3. Type of business with a
description of services
provided
4. Agreement by the owner to
follow the rules and codes.
Cherokee County Business
License Database
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THE TYPES OF BUSINESSES
ORGANIZATIONS
Sole Proprietorships
Advantages of Sole Proprietorships:
2.) Few Regulations: A proprietorship is the least-regulated
form of business organization.
 Most importantly, because they require little legal
paperwork, sole proprietorships are usually the least
expensive form of ownership to establish.
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Does this mean they have NO regulations?
 Even the smallest business, however, is subject to some
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regulation, especially industry-specific regulations.
For example, a gourmet soft pretzel stand would be subject
to health codes, and a painting business would be subject to
codes regarding dangerous chemicals.
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THE TYPES OF BUSINESS ORGANIZATIONS
Sole Proprietorships
Advantages of Sole Proprietorships:
3.) Owner makes all profit: If the business succeeds, the
owner does not have to share the success with anyone else.
4.) Total control of decisions: sole proprietors can run their
businesses as they wish.
 This means that they can respond quickly to changes
in the marketplace.
5.) Easy to Discontinue: Finally, if sole proprietors decide
to stop operations and do something else for a living, they can
do so easily.
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TYPES OF BUSINESSES
Sole Proprietorships
Disadvantages of Sole Proprietorships:
1.) Unlimited Personal Liability: sole proprietors are fully
and personally responsible for all their business debts &
taxes on profits.
2.) Limited Access To Resources: Many small business
owners use all of their available savings and other personal
resources to start up their businesses. This makes it difficult
or impossible for them to expand quickly.
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Also, they may lack HUMAN CAPITAL, which would make their
business suffer.
3.) When owner dies, the business dies: when owner dies
or retires the company ceases to exist.
4.) No Fringe Benefits: No healthcare plan, dental coverage,
401k retirement plan, or© paid
vacations
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END CHAPTER 8
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