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sole proprietorship

a business owned and managed by one person (most common form of business in US, but least used)


legal form of business with 2 or more owners (3rd largest form of business in US, medium use)


legal entity with authority to act and have liability separate form its owners (2nd largest form of businesses in US, but most used)


the right to use a specific business's name and sell its products or services in a given territory


business owned and controlled by the people who use it - producers, consumers, or workers with similar needs who pool their resources for mutual gain; top 3 are Nationalwide Mutual, CHS (food inc), and Dairy Farmers of America (food/ag)

major ownership decisions

1. ease to start and to terminate 2. scalability 3. ownership distribution 4. ownership transferability 5. personal liability 6. taxation

advantages of a sole proprietorship

1. easy to start/terminate 2. being your own boss 3. pride of ownership 4. retain profit 5. no special taxes 6. leaving a legacy

disadvantages of sole proprietorship

1. unlimited liability 2. limited financial resources 3. difficulty in management 4. time commitment 5. few fringe benefits 6. limited growth 7. limited life span

types of partnerships

general, limited, limited liability

general partnership

all owners share in operating the business and in assuming liability for business' debts

limited partnership

a partnership with one or more general partners and one or more limited partners

general partner

an owner who has unlimited liability and is active in managing the firm

limited partner

an owner who invests money in the business, but enjoys limited liability

limited liability

liability for the debts of the business is limited to the amount the limited partner puts into the company; personal assets are not at risk

limited liability partnership (LLP)

a partnership that limits partners' risk of losing their personal assets to only their own acts and omissions and to the acts and omissions of people under their supervision (you're not at fault if your partner screws up)

advantages of partnerships

more financial resources, shared management and pooled skills and knowledge, longer survival, no special taxes

disadvantages of partnerships

unlimited liability, division of profits, disagreements among partners, difficult to terminate

advantages of corporations

more money for investment, limited liability, separation of ownership from management, ease of ownership change, perpetual life, size, ease of drawing in talented employees

disadvantages of corporations

initial cost, paperwork two tax returns, termination difficult, double taxation, corporate governance, size

limited liability company (LLC)

a unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships

advantages of LLC

limited liability, choice of normal taxation, flexible ownership rules, flexible distribution of profits and losses, operating flexibility

disadvantages of LLC

no stock and therefore ownership is nontransferable, limited life span (set dissolution dates), fewer incentives, taxes, paperwork

franchise advantages

management and marketing assistance, personal ownership, recognized name, financial advice and assistance, lower failure rate

disadvantages of franchises

high start up costs, shared profit (royalty), management regulation, coattail effects, restrictions on selling, fraudulent franchisors

cooperatives need to avoid

1. uncommitted directors, 'dead weight' members, lack of transparency, lack of enough capital

not-for-profit organizations

organization whose primary objective is to support some issue or matter of private interest or public concern for non-commercial purposes

characteristics of not-for-profits

1. no profits, profit distribution, or stock insurance 2. does not pay taxes 3. monetary contribution to no-for-profit organizations are not included in taxable income

corporate governance

relationship of a company to its shareholders and, more broadly, to society

corporate pyramid

1. owners/stock holders elect board of directors 2. board of directors hires officers 3. officers set corporate objectives and select managers 4. managers supervise employees 5. employees work

Sarbanes-Oxley Act

prohibits audit firms from doing a variety of non-audit work for their clients (ie. forbid company loans to company execs, top execs must certify company accounts, makes managers responsible for maintaining an adequate internal control structure

business organization takeaways

there are many ways to organize a business, in terms of flexibility and ability to grow, the corporation is the more successful form of organization in US economy (but also presents most governance probs), franchising and cooperatives are alternative ways to exercise entrepreneurial control over organizations

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