CHAPTER FOUR
Forms of Business Ownership
CHAPTER SUMMARY
The three main forms of business organization include the proprietorship, the
partnership, and the corporation. Each form of ownership has its own set of advantages
and disadvantages. The proprietorship is represented by a single owner, who has rights
to all profits and control of the business. In the partnership, two or more partners co-
own the assets and share in the profits. Ownership of a corporation is represented
through the sale of stock in the corporation.
Businesses can also organize as limited liability companies, cooperatives, joint ventures,
and franchises. In addition, many companies grow through involvement in mergers; in
which two companies combine to form one company; and acquisitions, in which one
company or investor group buys another.
Looking ahead, Americans are getting older but continue to open new businesses; from
sole proprietorships to partnerships, corporations to franchise operations. The service
sector is booming in efforts to meet the demand for fitness, health, and eldercare. Other
key trends include an escalation of worldwide foreign investment through the number
of mergers taking place. All forms of business organization can benefit from outsourcing,
tapping into the intellectual capital of developing countries.
LEARNING OUTCOMES
1. What are the advantages and disadvantages of the of the sole proprietorship
form of business operation?
The advantages of sole proprietorships include ease and low cost of formation,
the owner’s rights to all profits, the owner’s control of the business, relative
freedom from government regulation, absence of special taxes, and ease of
dissolution. Disadvantages include owner’s unlimited liability for debts and
personal absorption of all losses, difficulty in raising capital, limited managerial
expertise, difficulty in finding qualified employees, large personal time
commitment, and unstable business life.
, 2. What are the advantages of operating as a partnership, and what downside
risks should partners consider?
The advantages of partnerships include ease of formation, availability of capital,
diversity of managerial skills and expertise, flexibility to respond to changing
business conditions, no special taxes, and relative freedom from government
control. Disadvantages include unlimited liability for general partners, potential
for conflict between partners, sharing of profits, and difficulty exiting or
dissolving the partnership. Partnerships can be formed as either general or
limited partnerships. In a general partnership, the operations of the business are
controlled by one or more general partners with unlimited liability. The partners
co-own the assets and share the profits. Each partner is individually liable for all
debts and contracts of the partnership. In a limited partnership, the limited
partners are financial partners whose liability is limited to their investment; they
do not participate in the firm’s operations.
3. How does the corporate structure provide advantages and disadvantages to a
company, and what are the major types of corporations?
A corporation is a legal entity chartered by a state. Its organizational structure
includes stockholders who own the corporation, a board of directors elected by
the stockholders to govern the firm, and officers who carry out the goals and
policies set by the board. Stockholders can sell or transfer their shares at any
time and are entitled to receive profits in the form of dividends. Advantages of
corporations include limited liability, ease of transferring ownership, unlimited
life tax deductions, and the ability to attract financing. Disadvantages include
double taxation of profits, the cost and complexity of formation, and
government restrictions.
4. What other options for business organization does a company have in addition
to sole proprietorships, partnerships, and corporations?
Businesses can also organize as limited liability companies, cooperatives, joint
ventures, and franchises. A limited liability company (LLC) provides limited
liability for its owners but is taxed like a partnership. These two features make it
an attractive form of business organization for many small firms. Cooperatives
are collectively owned by individuals or businesses with similar interests that
combine to achieve more economic power. Cooperatives distribute all profits to
their members. Two types of cooperatives are buyer and seller cooperatives. A
joint venture is an alliance of two or more companies formed to undertake a
special project. Joint ventures can be set up in various ways, through
partnerships or special-purpose corporations. By sharing management expertise,
technology, products, and financial and operational resources, companies can
reduce the risk of new enterprises.
September 4, 2018 2
Forms of Business Ownership
CHAPTER SUMMARY
The three main forms of business organization include the proprietorship, the
partnership, and the corporation. Each form of ownership has its own set of advantages
and disadvantages. The proprietorship is represented by a single owner, who has rights
to all profits and control of the business. In the partnership, two or more partners co-
own the assets and share in the profits. Ownership of a corporation is represented
through the sale of stock in the corporation.
Businesses can also organize as limited liability companies, cooperatives, joint ventures,
and franchises. In addition, many companies grow through involvement in mergers; in
which two companies combine to form one company; and acquisitions, in which one
company or investor group buys another.
Looking ahead, Americans are getting older but continue to open new businesses; from
sole proprietorships to partnerships, corporations to franchise operations. The service
sector is booming in efforts to meet the demand for fitness, health, and eldercare. Other
key trends include an escalation of worldwide foreign investment through the number
of mergers taking place. All forms of business organization can benefit from outsourcing,
tapping into the intellectual capital of developing countries.
LEARNING OUTCOMES
1. What are the advantages and disadvantages of the of the sole proprietorship
form of business operation?
The advantages of sole proprietorships include ease and low cost of formation,
the owner’s rights to all profits, the owner’s control of the business, relative
freedom from government regulation, absence of special taxes, and ease of
dissolution. Disadvantages include owner’s unlimited liability for debts and
personal absorption of all losses, difficulty in raising capital, limited managerial
expertise, difficulty in finding qualified employees, large personal time
commitment, and unstable business life.
, 2. What are the advantages of operating as a partnership, and what downside
risks should partners consider?
The advantages of partnerships include ease of formation, availability of capital,
diversity of managerial skills and expertise, flexibility to respond to changing
business conditions, no special taxes, and relative freedom from government
control. Disadvantages include unlimited liability for general partners, potential
for conflict between partners, sharing of profits, and difficulty exiting or
dissolving the partnership. Partnerships can be formed as either general or
limited partnerships. In a general partnership, the operations of the business are
controlled by one or more general partners with unlimited liability. The partners
co-own the assets and share the profits. Each partner is individually liable for all
debts and contracts of the partnership. In a limited partnership, the limited
partners are financial partners whose liability is limited to their investment; they
do not participate in the firm’s operations.
3. How does the corporate structure provide advantages and disadvantages to a
company, and what are the major types of corporations?
A corporation is a legal entity chartered by a state. Its organizational structure
includes stockholders who own the corporation, a board of directors elected by
the stockholders to govern the firm, and officers who carry out the goals and
policies set by the board. Stockholders can sell or transfer their shares at any
time and are entitled to receive profits in the form of dividends. Advantages of
corporations include limited liability, ease of transferring ownership, unlimited
life tax deductions, and the ability to attract financing. Disadvantages include
double taxation of profits, the cost and complexity of formation, and
government restrictions.
4. What other options for business organization does a company have in addition
to sole proprietorships, partnerships, and corporations?
Businesses can also organize as limited liability companies, cooperatives, joint
ventures, and franchises. A limited liability company (LLC) provides limited
liability for its owners but is taxed like a partnership. These two features make it
an attractive form of business organization for many small firms. Cooperatives
are collectively owned by individuals or businesses with similar interests that
combine to achieve more economic power. Cooperatives distribute all profits to
their members. Two types of cooperatives are buyer and seller cooperatives. A
joint venture is an alliance of two or more companies formed to undertake a
special project. Joint ventures can be set up in various ways, through
partnerships or special-purpose corporations. By sharing management expertise,
technology, products, and financial and operational resources, companies can
reduce the risk of new enterprises.
September 4, 2018 2
