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Learn about the 3 main types of business structures - Sole Proprietorship, Partnership, and Corporation. Explore their advantages, disadvantages, and scenarios of success or failure.
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Organizational Structures Ways that Businesses are Organized
3 Main Types of Business • Sole Proprietorship • Partnership • Corporation
Sole Proprietorship • One person owns the whole thing • Advantages • If the business succeeds, all the profits are yours • You own everything • Very easy to set up • Disadvantages • If the business fails, the failure is all yours • Personally liable
Sole Proprietorship (continued) • Disadvantages • Personal assets will be seized in order to recoup debt from lenders • Hard to raise money for expansion since all money invested must come from you
Scenario Sue Jenkins opens a sewing shop. She uses $2,000 of her own savings to get things started. To legally set her self up as a sole proprietor, she fills out a one page form and sends a check for $35 to the secretary of state. Sue owns a nice home valued at $250,000. She also owns a couple show horses worth $50,000.
Partnership • Two or more people (but usually a small number) own everything • Liability can be split equally or at a predetermined percentage • Advantages • If the business succeeds, all profits are split up amongst the partners • The partners own everything • Easy to set up
Partnership (continued) • Disadvantages • If t he business fails, all losses are recouped from owners • All financing must come from partners • Can get messy when trying to decide who is personally liable for what
Scenario Jennifer and Brittani open a bakery. Jennifer has always loved baking and Brittani has always wanted to run a restaurant business. It is agreed at formation that 20% of the partnership is Jennifer’s responsibility and 80% is Brittani’s. Jennifer rents a small apartment and has $500 in the bank. Brittani owns several stores in town and inherited a huge farm out in the country.
Corporation • One up to millions of people own portions of the business • Each Portion is Called “Stock” • Big decisions are made by voting • The votes of the people with the most stock counts more than those with less stock • Profits are shared whereas people with more stock (i.e. more pieces of the company) get more profits than those with less stock
Corporations (continued) • Advantages • Very easy to raise money since many people will potentially buy stock (i.e. contribute financially) to the company • Zero personal liability • Disadvantages • Difficult and expensive to setup • Requires lawyers, FTC approval, chunk of money, and time
Corporations (continued) • Profits are split up amongst all the stockholders based on amount of stock • No direct control of the company • Some people may have direct control if they own a lot of stock and are employed by the company • This is usually not the case • Board of Directors are elected/appointed to run things • No direct ownership of assets
Scenario A bunch of business people get together and decide to start a company that plans to sell hats all over the United States. The business people manage to get 5,000 people to purchase 1 million shares at $15 per share A board of directors is appointed and purchasing of property, plant, and equipment begins. After this initial round of purchasing, employees are hired.