Types of Business
Organizations
Chapter 8 Notes
Sole Proprietorships
Section 1
The Characteristics of
Sole Proprietorships
 Every business begins with an idea and someone who
wants to earn money.
 Business organization – an enterprise that produces
goods or provides services, usually to make a profit.
 In the course of earning profits, business provide goods
and services, jobs, income, pay taxes.
 The most common type of business is a Sole
proprietorship – a business owned and controlled by one
person. About 70% of businesses in America. < 5% of
sales.
Read Bart’s Cosmic
Comics – pg 227
 Raising Funds – his own savings, loan from family and
friends.
 Preparing to Open – business license, site permit
 Initial difficulties – spent money on advertising to kick
start business
 Success – pays back loans, earns a profit, gets loan from
a bank because he has proven success
Sole Proprietorships:
Advantages and
Disadvantages
 Not governed by as many regulations as other types of
businesses
 Sole proprietorship – a business owned and controlled by
one person
 Limited life – a situation in which a business ceases to
exist if the owners dies, retires of leaves
 Unlimited liability – a situation in which a business
owner is responsible for all the losses and debts of a
business
ADVANTAGES
 Easy to Open or Close –
 Few Regulations – zoning, labor laws apply
 Freedom and Control – be your own boss
 Owner Keeps Profits –
DISADVANTAGES
 Limited Funds –
 Limited Life –
 Unlimited Liability – owner is personally responsible for
the debts of the business. Can lose your home, car and
savings.
Forms of Partnerships
Section 2
Partnership – a business
co-owned by two or more
people, or “partners”, who
agree on how
responsibilities, profits,
and losses should be
divided
Types of Partnerships

1 - General partnership – a partnership in which each partner shares the
management of the business and is liable for all business debts and losses; could put
personal savings at risk.

Share in the rewards of the business. Found in almost all areas of business.

2 - Limited partnership – a partnership in which at least one partner is not involved
in running the business and is liable only for the funds he or she invested. Consist
of a General Partner and any number of limited partners.

3 - Limited liability partnership – LLP - a partnership in which all partners are not
responsible for the debts and other liabilities of the other partners. Personal savings
are not at risk unless the debts arise from their own mistakes.

Not all businesses can register as an LLP. Those that can include medical
partnerships, law firms, accounting firms; businesses in which malpractice can be an
issue.
ADVANTAGES
 Easy to Open and Close – can close the business as long as the bills
are settled.
 Few Regulations – Partners enter into a legal agreement spelling out
their rights and responsibilities as partners. Uniform Partnership Act
(UPA)
 Access to Resources – more funds; easier to get loans and keep
workers.
 Joint Decision Making – each partner bring his or her perspective to
the decision making process. The exception is limited partnership;
limited partners do not get to participate in running the business.
 Specialization – each partner may bring specific skills to the
business.
DISADVANTAGES
 Unlimited liability – a situation in which a business
owner is responsible for all the losses and debts of a
business; personal savings and property are at risk to
settle the businesses debts.
 Potential for Conflict – multiple decision makers
 Limited life – a situation in which a business ceases to
exist if the owners dies, retires of leaves; new partnership
agreements must be established if a partner leaves or a
new partner is added. The business as it was originally
formed ceases to exist.
Corporations, Mergers
and Multinationals
Section 3
Characteristics of a
Corporation
 Corporation – a business owned by shareholders, also called
stockholders, who own the rights to the company’s profits but
face only limited liability for the company’s debts and losses
 Shareholders acquire ownership rights through the purchase
of Stock – shares of ownership in a corporation
 If a company does well it can pay a Dividend – the part of a
corporations profit that the company pays the stockholders
 Public company – a corporation that issues stock that can be
freely traded
 Private company – a corporation that controls who can buy or
sell its stock
 Corporations make up about 20% of the number of
businesses in the US, but they produce most of the goods
and services and employ the majority of workers.
 Stock Holders elect a Board of Directors that hires
Corporate Officers that are in charge of the running of
the company.
 The stockholders and board of directors are not involved
in the day-to-day operation of the company.
Corporations:
Advantages and
Disadvantages
ADVANTAGES
 Access to Resources – borrow from banks, sell stocks, issue Bonds –
a contract a corporation issues that promises to repay borrowed
money, plus interest, on a fixed schedule. All these resources allow
corporations to expand their business. Just don’t have to rely on
company profits.
 Professional Managers – corporations can hire people with strong
backgrounds in management to run different divisions of the
company.
 Limit Liability - Limited liability – a situation in which a business
owner’s liability for business debts and losses is limited.
Stockholders are liable only for the money they paid for their stock.
The board of directors and officers are protected from liability.
 Unlimited life – a situation in which a corporation continues to exist
even after a change in ownership.
DISADVANTAGES
 Start-up cost and effort – setting up a corporation is more
difficult , time-consuming and expensive than setting up a
partnership or sole proprietorship. Paperwork has to be filed
with the state; lawyers.
 Heavy Regulation – annual reports for the Securities and
Exchange Commission (SEC); quarterly financial reports for
stockholders; annual meetings for stockholders.
 Double Taxation – Taxes are paid on corporate earnings and
then again on dividends paid out to shareholders.
 Loss of Control – founders of a company may lose control of
the company when they bring in other members of the board
of directors.
Business Consolidation
 Why do businesses consolidate?




Increased efficiency
Gaining a new identity as a business or losing an old one
Keeping rivals out of a market place
Diversifying the product line
 Horizontal merger – the joining of two or more companies
that offer the same or similar products or services
 Vertical merger – the combining of two or more businesses
involved in different steps of producing or marketing a
product or service
 Mergers make both companies more efficient by taking
advantage of each others strengths - types of mergers
 Conglomerate – a business composed of companies that
produce unrelated goods or services; diversification; the
parent company is protected against isolated economic
pressures
 Multinational corporation – a corporation with branches
in several countries; provide new jobs, services and
goods around the world and spread technological
advances. Jobs and tax revenues help raise the standard
of living in poorer countries.
 However, some nations have lax environmental and
labor regulations.
Franchises, Co-ops, and
Nonprofits
Section 4
Franchises
 Franchise – a business made up of semi-independent
businesses that all offer the same products or services
 Franchisee – a semi-independent that pays a fee for the
rights to sell the parent company’s products or services in
a particular area
Franchises –
ADVANTAGES
 Higher level of independence than working for someone
else.
 Franchiser provides good training in running the
business.
 Franchiser provides proven products, common décor at a
relatively low cost.
 Franchiser provides national or regional advertising to
bring in customers.
Franchises –
DISADVANTAGES
 Franchisee Invest money with no guarantee of success.
 Franchisee has to share some of the profits with the
franchiser.
 Franchisee does not have control over some aspects of
the business; has to buy materials only from the
franchiser and is limited in selling only products offered
by the franchiser.
CORPORATION
FRANCHISEES
1 – McDonald’s
30,300
2 – Yum! Brands (KFC< Taco Bell, etc)
29,300
3 – 7-Eleven
28,200
4 – Cendent (Howard Johnson’s, Avis, etc.)
24,600
5 - Subway
21,000
Cooperatives and
Nonprofits
 Most businesses exist to earn a profit. Not all businesses
exist to make a profit.
 Cooperative – a type of business that operates for the
shared benefit of the owners, who are also its customers
 Nonprofit organization – an institution that acts like a
business but exist to benefit society rather than to make a
profit
A Business Organization
for its Members
 When people who need a good or service band together
and act like a business they can offer low prices by
reducing or eliminating profits. The are called co-ops.
Three basic types of co-ops:
 CONSUMER – purchasing co-ops. Consumer co-ops
require some kind of membership payment, either in the
form of labor or monetary fees. They keep prices low by
purchasing goods in large volumes at a discount price.
(Organic food co-op, warehouse club)
 SERVICE – Offer their members a service. (Credit
Unions)
 PRODUCER – Mainly owned and operated by
producers of Agriculture products. Join together to
ensure cheaper, more efficient processing or better
marketing of their products.
A Purpose other than Profit - Nonprofits
 Some benefit society – American Red Cross – provide services
at little or no cost.
 Professional organizations – promote the common interest of
their members – American Bar Association
 Business associations, trade associations, labor unions,
museums – all types of organizations perusing goals other
than profit.
 Structure resembles a corporation but don’t pay taxes because
they don’t make money, yet serve society.
 Raise money through donations, grants, membership fees.
Sell goods or services not to make profits but as a way to raise
funds.