WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF

EACH?Sole Proprietorships

Partnerships

Corporations

Unit Three: Microeconomics

Types of Businesses

THREE TYPES OF BUSINESSES

• Partnerships• Owned by two or more people, called partners

• Corporations• Owned by stockholders, those who purchase shares of

its stock

SOLE PROPRIETORSHIPS

• Owned by one person, the proprietor

• Seven out of every 10 businesses is a sole proprietorship

• Common in these industries• Health care• Real estate• Retail trade• Agriculture• The arts

ADVANTAGES OF A SOLE PROPRIETORSHIP

1. Easy and cheap to start up

2. Ease of decision making• You are your own boss• You don’t need anyone’s approval to try something

new• You can respond rapidly to changing market

conditions

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ADVANTAGES OF A SOLE PROPRIETORSHIP CONTINUED

3. Ownership of profits• All of the profits belong to YOU!

4. Tax benefits• Your profits are considered part of your ordinary

income

5. Intrinsic rewards• The feeling of accomplishment from building a

successful business

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# 3 Cont.

DISADVANTAGES OF A

SOLE PROPRIETORSHIP1. Burden of responsibility

• All tough decisions are on your shoulders• Employees look to you for guidance• If you are sick or on vacation its still your

responsibility

2. Difficulty raising funds• Banks may not want to lend money • Many end up funding their start-up with savings or

borrowing from friends and family

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# 3 Cont.

DISADVANTAGES OF A SOLE PROPRIETORSHIP CONTINUED

3. Unlimited liability• Sole proprietors are personally responsible for all

the debts and other obligations of the business• You may have to use your personal wealth (perhaps

even sell your house) to settle or fight a lawsuit

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# 3 Cont.

PARTNERSHIPS• A for-profit business owned by two or

more people

• Only 1 in 10 businesses are partnerships

• Common in these industries• Stores• Restaurants• Contractors• Law firms• Medical practices• Business consulting firms

HOW TO CREATE A PARTNERSHIP

• Easy to start• Register the name of the business• Check and conform to regulations• Obtain any necessary licenses and permits• Keep records and prepare tax forms• Create a partnership agreement

• Partnership agreements identify:• the roles, responsibilities and obligations of the

partners• solutions to what-ifs• which partners are general partners and which are

limited partners

ADVANTAGES OF A PARTNERSHIP1. Larger pool of financing

• Each partner can contribute funds• Banks are more willing when they can collect from more

than one person

2. Shared decision making• Tough decision burden is shared• If one is ill or on vacation, the other can handle the firm

3. Benefits of specialization• Each can work at the tasks he or she is best suited, such

as sales or accounting

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DISADVANTAGES OF A PARTNERSHIP

1. Unlimited liability for general partners• Each general partner shares personal responsibility for all

the debts and other obligations of the business• If the business fails, or someone sues the business you

will need to use your personal wealth to pay it back

2. Disagreement among partners• If you don’t agree on a decision, you might argue

endlessly or generate bad feelings

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Cont.

CORPORATIONS• Corporations are legal entities

• The law treats corporations similar to how it treats people

• They can own property, enter into contracts with people or other businesses, and bring lawsuits

CREATING A CORPORATION

• Much more expensive and time consuming than creating a partnership or sole proprietorship

• One in 5 businesses are corporations

• Complete a corporate charter, or certificate of incorporation

ADVANTAGES OF A CORPORATION

1. Limited liability for stockholders• Stockholders losses are limited to what they paid to

buy their shares of stock• No one can go after their personal wealth

2. Ability to raise funds by issuing stock• Only corporations can raise money by selling stock

3. Ability to raise funds by issuing bonds• Only corporations can borrow money directly from

the public by issuing and selling bonds

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ADVANTAGES OF A CORPORATION CONTINUED

4. Rapid growth• If successful, can get large amounts of money quickly• Can take advantage of economies of scale—which

means that the cost per unit falls as output rises, thanks to major costs being spread over a growing quantity of output.

• Example of economies of scale• Developer spends $5,000 creating a cell phone app• If one person buys the app, the developer’s fixed cost per

unit is $5,000• If 1,000 people buy the app, the developer’s fixed cost per

unit is $5

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DISADVANTAGES OF A CORPORATION

1. Expensive start-up costs• Forming a corporation involves higher legal fees

2. Low nonmonetary rewards• No satisfaction from running your own business

3. Delays in decision making• Layers of decision makers can make it difficult to

move fast as market conditions change

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TYPICAL STRUCTURE OF A CORPORATION

Understanding Corporate Structure

DISADVANTAGES OF A CORPORATION CONTINUED

4. Divided ownership of profits• Corporate profits are divided among stockholders• Decisions about how to spend profits are made by the

corporation’s managers and board of directors

5. Tax treatment—Double taxed!• Corporate profits are taxed, then any profits paid to

stockholders are taxed again (as income)

6. More reporting requirements• Corporations face more regulations than other business

types• Stricter health, safety, and environmental rules• More closely monitored

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WHAT IS THE ETHICAL AND SOCIAL RESPONSIBILITY OF

BUSINESS?

“There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud.”

--Milton Friedman

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