Understanding Types of Business Organizations: Sole Proprietorships, Partnerships, and Corporations

1. Economic Notes Chapter 3

2. Types of Business Organization • Single Proprietorship – Business owned by one person, easiest to organize, most common type of business • Ex. Hair salons, auto shop, restaurants, etc • Partnership – 2 or more owners, least common type of business • Ex. Doctor, dentist, law offices • Corporation – Business owned by stock holders, most protected type of business, most difficult to organize • Ex. GM, Apple, Exxon, Disney, etc.

3. Business Terms: • Liability – financial responsibility • Unlimited Liability – total financial responsibility up to and including private property and accounts • Limited Liability – financial responsibility is limited to your investment • Limited Life – business is limited to the life of the owner

4. Unlimited Life – business continues as long as it is making a profit • Stock – share of ownership in a corporation • Rent – payment for the use of someone’s property • Interest – payment for the use of someone’s money • Prime Rate – the best interest rate, reserved for the best customers

5. Bond – an I.O.U. , a promise to pay back the amount of the bond at a specific time with a specific rate of interest • Dividends – a share of the corporations profit paid to stockholders • Capital Gain – investment earnings, the amount of money you made in an investment • Ex. Purchase a house for $100,000 and sell it for $140,000 and you have $40,000 in capital gains

6. Charter – a government document that gives permission to create a corporation • Principal – the amount borrowed • Gross Income – total income earned • Net Income – earnings after taxes and expenses • Depreciation – the loss in value an item experiences over time

7. Merger – combining two or more businesses to form a single firm • Horizontal merger – combines firms from the same industry • Ex. All airlines join together • Vertical Merger – combines firms that perform different steps in the production process • Ex. Farm industry, canning factory, trucking company, warehouse and retail store all join together

8. Conglomerate – a firm that has at least four businesses, each making unrelated products • Ex. R.J. Reynolds owns a shipping company, Kentucky Fried Chicken, Del Monte and a Winery • Diversification – business interests in many different areas • Multinational – a corporation that has manufacturing or service operations in a number of different countries • Ex. General Motors, Union Carbide, Nabisco, Mitsubishi, Sony, etc.

9. Advantages to Single Proprietorships • * Easy to organize • * Flexible • * You are the Boss

10. Disadvantage to a Single Proprietorship • * Unlimited Liability • * Limited Life • * You have all of the responsibility

11. Advantages to a Partnership • * Share the work • * Share the Cost • * Specialization

12. Disadvantages to a partnership • Unlimited liability • Limited life • Disagreements • Less flexibility

13. Advantages to a Corporation • Limited liability • Unlimited life • Specialization • Ability to sell stock

14. Disadvantages to a Corporation • *Corporate taxes • Less flexibility • More difficult to organize