Sole proprietorships and partnerships are common in the united states today

Business can be organized in the United States in a number of ways. The two most common are a sole proprietorship and a partnership.

Sole Proprietorship

The most basic type of business organization is the sole proprietorship, a business owned by one person. It is the oldest form of business organization and also the most common. The colonies of Maryland and Pennsylvania were founded as sole proprietorships. When we speak of a proprietor, we are always referring to the owner of a business. The word proprietor comes from the Latin word proprietas, meaning «property.» A business is a kind of property.

Today, the United States has about 14 million such businesses, and many of them are small. For that reason, they usually are easier and less expensive to start and run. You probably have contact with many sole proprietorships every day without realizing it - owners of corner grocery stores, repair shops, dry cleaners, and so on. Many doctors, dentists, lawyers, and accountants are sole proprietors. In farming, construction, and contracting, sole proprietorships are the most numerous types of business organization. The following table shows advantages and disadvantages of a sole proprietorship.

Advantages disadvantages

Profits and losses

+ As sole owner, the proprietor receives all the profits because he or she takes all the risks.

• Losses are not shared.

Liability

- The proprietor has complete legal responsibility for all debts and damages brought upon oneself in doing business. This is known as unlimited liability. If the firm is unable to pay its bills or if someone is injured as a result of the business, the proprietor can be forced to sell his or her personal assets as well as the business to pay these debts. Assets are items of value such as houses, cars, jewelry, and so on.

Management

+ Decisions on starting and running the business can be made quickly because the owner does not have to consult with other people. Because a proprietorship is usually small, the operation of the business is less complicated than other types of business. There are generally fewer government regulations than with corporations. -A proprietor must handle all decision making, even for unfamiliar areas of the business. For example, the owner of a manufacturing firm may know a great deal about product design, but very little about selling. This is a severe problem for many sole proprietorships.

Taxes

+ A proprietor must pay personal income taxes on profits, but these taxes may be lower than taxes for a corporation.

Personal satisfaction

+ The proprietor has full pride in owning the business. The person is his or her own boss and makes the business whatever it is.

-Running a sole proprietorship is demanding and time-consuming. If the proprietor does not enjoy such responsibility, he or she will find ownership a burden. Financing growth

+Because the proprietor has liability for all debts, it is occasionally easier for a proprietorship to obtain credit than for a corporation of the same size. Lenders are more willing to extend credit knowing that they can take over not only the assets of the business, but also the assets of the proprietor if the loan is not paid back.

-A sole proprietor must rely on his or her own funds plus money that can be borrowed from others. Borrowing small amounts may be easier for a sole proprietorship than for a corporation of similar size, but borrowing large amounts can be difficult.

Life of the business

+ A sole proprietorship depends on one individual. If that person dies, goes bankrupt, or is unwilling or unable to work, the business will probably close. This uncertainty about the future increases the risk to both employees and creditors. Help in starting a small business For a person who wants to start a sole proprietorship, help is available. The federal government’s Small Business Administration often helps finance startups, which are new small businesses. State departments of commerce and community affairs also offer assistance. Many community college and university campuses have federally funded small business development centres that will help a small business get started. A small business incubator might also aid businesses. Just as incubators help hatch chickens, there are business incubators that help «hatch» small businesses. They are often operated with state and federal funds. A small business incubator might provide a low-rent building, management advice, and computers. The incubator’s goal is to generate job creation and economic growth, particularly in depressed states. Partnerships To take the example of your repair business a little further, suppose that your business is doing so well that your workload has increased to the point at which you have little time for anything else. You could expand your business by hiring an employee. You also need financial capital, but would rather not take out a loan. You may look into taking on a partner. You decide that the best solution is to look for someone who can keep books, handle customers, and invest in the business. You offer to form a partnership. A partnership is a business that two or more individuals own and operate. You may sign a partnership agreement that is legally binding. It describes the duties of each partner, the division of profits, and the distribution of assets should the partners end the agreement. Many doctors, dentists, architects, and lawyers work in partnerships. Two or more people often own small stores. The following table lists some of the major advantages and disadvantages of partnerships. ADVANTAGES DISADVANTAGES Profits and losses Losses are shared. Several individuals can sometimes survive a loss that might bankrupt a sole proprietor. Because partners share the risks of the business, they also share the profits. Liability Partners as a group have unlimited 49 liability for all debts and damages incurred in business. If a partner is unable to pay his or her share of a debt, the others must make up for the difference. Management Partnerships are usually more efficient than proprietorships. They allow each partner to work in areas of the business that he or she knows most about or is best at doing. Decision making is often slow because of the need to reach agreement among several people. Disagreements can lead to problems in running the business. Taxes Partners must pay personal income taxes on their share of profit. These taxes are sometimes lower than those for a corporation. Personal satisfaction Partners, like sole proprietors, often feel pride in owning and operating their own company. If partners do not get along with each other, trying to work together can result in constant arguments. Financing growth A partnership combines the capital of two or more people. It makes more money available to operate a larger and perhaps more profitable business. Because the risk is shared, creditors are often willing to lend more money to a partnership than to a sole proprietorship. Like sole proprietorships, partnerships can have trouble obtaining large amounts of capital. The amount that partnerships can borrow is usually limited by the combined value of the assets of the business and of the partners. Life of the business If one partner dies or leaves, the partnership must be ended and reorganized. The others may be unable or unwilling to continue operating, and the business may close. This uncertainty is a risk to employees and creditors. Limited Partnerships. A limited partnership is a special form of partnership in which the partners are not equal. One partner is called the general partner. This person (or persons) assumes all of the management duties and has full responsibilities for the debts of the limited partnership. The other partners are «limited» because all they do is contribute money or property. They have no voice in the partnership’s management. The advantage to the limited partners is that they have no liability for the losses beyond what they initially invest. The disadvantage, of course, is that they have no say in how the business is run. Limited partnerships must follow specific guidelines when they are 50 formed. Two or more partners must sign a certificate of limited partnership in which they present, at a minimum, the following information:  The company name  The nature of the business  The principal place of business  The name and place of residence of each partner  How long the partnership will last  The amount of cash or other property contributed by each partner Joint Ventures. Sometimes individuals or companies want to do a special project together. They do not have any desire to work together after the project is done. What they might do is form a joint venture. A joint venture is a temporary partnership set up for a specific purpose and for a short period of time.

Exercise 6 After reading the text in Exercise 5, you should be able to fill in the missing word or words:

Physicians, writers, and local grocery store owners often do business as (1) _____. The owner of the business is known as a (2) _____ and accepts all the risks and rewards. One advantage of this form of business is that the owner may find it easier to obtain (3) _____ because the business serves as (4) _____ for loans. Pride of ownership is balanced by the fact that running a business is very (5) _____ Also, borrowing (6) _____ can be difficult, which may create a shortage of funds. If the owner dies or is unable to work, the business may be forced to (7) _____. Such uncertainty increases risks to both (8) _____ and _____. Small business startups can be financed by the federal government’s (9) _____ or by state departments of (10) _____. In some cases, universities or colleges have (11) _____, whose goals are to foster job creation and (12) _____. If a business grows rapidly, an owner may form a partnership with two or more people. These people sign a (13) _____ that is legally binding on all parties. If one partner provides money but does not help manage the business, the arrangement is known as a (14) _____ In other cases, a partnership known as a (15) _____ may be formed for a specific purpose. Advantages of a partnership include the fact that losses are (16) _____, partnerships are generally more (17) _____, the owners pay (18) _____ only on their share of profits, and often more (19) _____ are available to finance growth. Disadvantages include (20) _____ on debts and the fact that: if one partner dies, the business must be (21) _____.

Exercise 7 Read the following text and describe the advantages and disadvantages of a corporation: THE CORPORATE WORLD Suppose your electronic repair business has grown.

You now have several partners and have turned your garage into a shop. You would like to expand and rent a store so that your business would be more visible. You would like to buy the latest equipment, charge a little less than your competitors, and capture a larger share of the market for electronic repair work. You need money capital, however. You have decided that you do not want any more partners. You would have to consult with them about every detail of the business as you do now with your present partners. What you want is financial backers who will let you use their money while letting you run the business. What you are proposing is a corporation. The following table shows the advantages and disadvantages of corporations.

ADVANTAGES DISADVANTAGES

Profits and losses Owners of the corporation – stockholders – do not have to devote time to the company to make money on their investment. Liability The corporation, and not its stockholders, is responsible for its debts. If a corporation goes bankrupt or is sued, creditors cannot normally take personal property from stockholders to pay debts. This is known as limited liability, and may be the major advantage of the corporate form of business. Management Responsibility for running a corporation is divided among many people. Decisions are made at many levels by individuals trained in specific areas, such as sales, production, and so on. This allows a corporation to handle large and complicated operations and to carry on many types of business activities at the same time. Decision making can be slow and complicated because so many levels of management are involved. Also, the interests of those running the corporation, who may not be stockholders, are not always the same as those of the stockholders, who often seek an immediate return on investment. Taxes The federal government and some state and local governments tax corporate profits. The profits that are paid to stockholders as dividends are again taxed as income to those 52 individuals. Some states also tax corporate property. Personal satisfaction An individual may feel satisfaction simply in owning a part of a corporation. Individual stockholders have little or no say in how a corporation is run. Financing growth Corporations draw on resources of investors and may issue stock at any time to raise capital. Life of the business The life of a corporation can continue indefinitely if it remains profitable. Its life is not affected by the death of stockholders. A corporation is an organization led by many people but treated by the law as though it were a person. It own property, pay taxes, make contracts, sue and be sued, and so on. It has a separate and distinct existence from the stockholders who own the corporation’s stock. Stock represents ownership rights to a certain portion of the profits and assets of the company that issues the stock. In terms of the amount of business done (measured in dollars), the corporation is the most important type of business organization in the United States today. In order to form a corporation, its founders must do three things. First, they must register their company with the government of the state in which it will be headquartered. Second, they must sell stock. Third, along with the other shareholders, they must elect a board of directors. Registering the Corporation. Every state has laws governing the formation of corporations, but most state laws are similar. Suppose that you and your partners decide to form a corporation. You will have to file articles of incorporation application with the state in which you will run your corporation. In general, these articles include four items: 1. Name, address, and purpose of the corporation; 2. Names and addresses of the initial board of directors (these men and women will serve until the first stockholders’ meeting, when a new board may be elected); 3. Number of shares of stock to be issued; 4. Amount of money capital to be raised through issuing stock. If the articles are in agreement with state law, the state will grant you a corporate charter - a license to operate from that state. Selling Stock. To continue the example of your electronic repair business, you could sell shares of either common or preferred stock in your new corporation. Common stock gives the holder part ownership in the corporation and voting rights at the annual stockholders’ meeting. It does not guarantee a dividend - money return on the money invested in a company’s stock. Preferred stock does guarantee a certain amount of dividend each year. Preferred stock also guarantees to the stockholder first claim, after creditors have been paid, on whatever value is left in the corporation if it goes out of business. Holders of preferred stock usually do not have voting rights in the corporation, although they are part owners. If your corporation were to become large, you might find its stock traded in the local stock market as over-the-counter stock. Over-the-counter means that individual brokerage 53 firms hold quantities of shares of stocks that they buy and sell for investors. Should your corporation continue to grow, it would be traded on a regional stock exchange. It might be listed as an over-the-counter stock with the National Association of Securities Dealers Automated Quotation (NASDAQ) in one of their three lists. The largest corporations are usually listed on the New York Stock Exchange (NYSE). Naming a Board of Directors. To become incorporated, a company must have a board of directors. You and your partners, as founders of the corporation, would select the first board for your corporation. After that stockholders at their annual stockholders’ meetings would elect the board. The bylaws of the corporation govern this election. Bylaws are a set of rules describing how stock will be sold and dividends paid, with a list of the duties of the company’s officers. They are written after the corporate charter has been granted. The board is responsible for supervising and controlling the corporation. It does not run business operations on a day-to-day basis, however. Rather, it hires officers for the company - president, vice-president(s) secretary, and treasurer - to run the business and hire other employees.

Exercise 8 After reading the text in Exercise 7, fill in the missing word or words:

Although a corporation is owned by many people, it is treated by the law as if it were a (1) _____. A corporation can make (2) _____, pay taxes, and own (3) _____. (4) _____ represents ownership in the corporation and a right to a portion of the (5) _____ and _____ of the company. To register a corporation, the owners must file an (6) _____ application. If it is approved, the state will issue a (7) _____, which is a license to do business. Stockholders who own (8) _____ have voting rights in the corporation. However, unlike owners of (9) _____, they are not guaranteed a dividend nor do they have first claim on corporate assets. A corporation must also select a (10) _____ and establish the (11) _____, or set of rules, in order to operate. Two major advantages of a corporation are (12) _____ for debts and the fact that it can continue (13) _____. Disadvantages are that (14) _____ is often slow and complicated because of the levels of management involved and that corporations often pay several kinds of (15) _____ on profits and income.

Exercise 9 Summarize the advantages and disadvantages of franchising and explain what types of businesses are involved in it: