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Understanding Business Entities: Sole Proprietorships, Partnerships, and Corporations

Dive into the world of sole proprietorships, partnerships, and corporations - their advantages, disadvantages, and key characteristics. Learn about spillovers, externalities, public goods, and the role of government in the business landscape.

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Understanding Business Entities: Sole Proprietorships, Partnerships, and Corporations

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  1. Chapter 5

  2. Sole Proprietorships Run by one person. • Most numerous and most profitable

  3. Advantages • Ease of start-up • Ease of management • Owner gets all the profits • Business pays no income tax • Ease of closing the business

  4. Disadvantages Unlimited liability • Hard to raise financial capital • Difficult to hire personnel or stock enough inventory to operate efficiently • Limited managerial experience • Hard to attract qualified employees • Business has limited life (death or sale)

  5. Partnerships • Jointly owned by two or more persons. • Least numerous and least profitable • General partnership-all partners are involved • Limited partnership-one partner not involved (investor)

  6. Advantages • Ease of start-up • Ease of management • No special taxes on business • Easier to raise capital through bank loans or new partner • Easier to attract skilled employees

  7. Disadvantages • Responsibility for the acts of each partner • Partnership ends if one partner leaves or dies • Potential for partner conflict

  8. Corporations • Business organization recognized by law as a separate legal entity with all the rights of an individual • Must obtain a charter from the state • Investors buy stock and become owners

  9. Advantages • Ease of raising capital • Professionals may run the firm instead of the owners • Limited liability • Business life is unlimited • Easy to transfer ownership

  10. Disadvantages • Charter is expensive • Corporate income is taxed twice • Government regulations

  11. Spillovers/Externalities • Benefit or cost to a third party-not the buyer or seller • Cost-market must use additional resources to cover costs incurred through no fault of the 3rd party • Benefits-a third party may benefit from resources used by buyer and seller.

  12. Public goods • Goods/services used by everyone, but cost is not individually divided.

  13. Circular flow revisited • Let’s add the government--- • Government goes in the middle and receives income in the form of tax revenue and expenditures in the form of transfer payments. They also provide public goods/services for use by households.

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