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. 1. What are the advantages and disadvantages of the sole proprietorship form of business organization? The advantage 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, difficulty in raising capital, limited managerial expertise, difficulty in finding qualified employees, large personal time commitment, unstable business life, and the owner's personal absorption of all losses. 2. What are the advantages of operating as a partnership, and when downside risks should partners consider? Partnerships can be found as either general or limited partnerships. In a general partnership the partners co-own the assets and share the profits. Each partner is individually liable for all debts and contracts of the partnership. The operations of a limited partnership are controlled by one or more general partners with unlimited liability. Limited partners are financial partners whose liability is limited to their investment; they do not participate in the firm's operations. The advantages of partnerships include ease of formation, availability of capital, diversity of managerial expertise, flexibility to respond to changing business conditions, 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. 3. How does the corporate structure provide advantages and disadvantages to a company, and what are 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 tax deductions, and ability to attract financing. Disadvantages include double taxation of profits at a somewhat reduced rate, the cost and complexity of formation, and government restrictions.