Advantages/Disadvantages of Sole Proprietorship, Partnerships, and Corporations
Corporations A/D
when a business incorporates and raises capital [money for the business] by selling share of the company [stock] to the general public o Advantages - raise larger amounts of money to invest in the business; limited liability; perpetual life - they go on even if some of the people die or sell their stock...they go on as long as the business is profitable; tax breaks o Disadvantages - profits are shared with all of the stockholders depending on the amount of stock owned; subject to more government regulations than sole proprietorship and partnerships;
Sole Proprietorship
Management: One owner. Easy to start. More flexibility and quicker decisions b/c there is only one person. Limited to the skills of the owner. Legal Entity: Owner and business are one and the same. Profit: The owner receives all of the profit made. Raising Money: Cannot raise money quickly, and thus is limited to the factors of production that the owner can obtain. Life: Limited lifespan. Only lives as long as the owner continues to live. Once the owner dies, the business dies. Liability: Have 'unlimited liability,' meaning that the owner is liable for all business debt if the business can't pay its liability. [BIG DISADVANTAGE] that all the losses are the owner's responsibility.
Partnership
Management: Two or more people. Relationship between the owners is defined by a contract. Can take a little more time than a sole proprietorship to startup, because a contract must be made that specifically states who is owner of what. Decision making will not be as fast or immediate, because the opinions of all parties must be considered. Yet, decisions are made faster than in a company. Legal Entity: The owners and the business are one and the same. Profit: The owners control all the profit. Raising Money: Cannot raise money quickly and is limited to what the owners are able to gather out of the factors of production. Yet, it can be slightly easier if it was a sole proprietorship. Life: Limited lifespan. Only lives as long as the owners live. Once the owners die, the business dies as well. Liability: They have 'unlimited liability,' meaning that the owners are responsible for all business debt, if the business can't pay for itself. All the losses are both of the owners' responsibility.
Sole Proprietorship A/D
o Advantages - owner gets all of the profits and gets to make all of the business decisions - he/she has total control. This is the type of business that if it works is the most profitable and there are tax advantages. o Disadvantages - the owner is responsible for all the start-up costs; "unlimited liability" - if the business does not do well the owner is still responsible for any debt amassed by the business [even if there are no profits]. Also if someone sues the business the owner could lose their own personal property [house, car, etc.] if they have to pay out on the lawsuit. Limited resources. Owner has to work harder because they are solely responsible for the success of the business. [THIS IS THE MOST RISKY TYPE OF BUSINESS STRUCTURE ] [individually owned businesses]
Partnerships A/D
when two or more individuals enter into a business together with equally shared $$ responsibility o Advantages - People [2 or more] share the start-up costs equally and share the profits [or losses] equally. Business decisions are made by agreement of the partners. The risks are less than with a sole proprietorship. There is a signed partnership agreement that details the extent of the partnership. o Disadvantages - There is not as much potential profit as with a sole proprietorship. Sometimes when partners disagree on business decisions there is conflict. There is still "unlimited liability" so that each partner is fully liable for the debt of the partnership. If one or more partners does not do their part of the work, the others are still responsible for paying any debts incurred by the business if it does not do well. Partnerships have to be built on TRUST between the partners that all will be honest. A partnership has "limited life" meaning that it can be dissolved if one of the partners wants out of the partnership.
Limited liability
When you are suing the company, not the investors themselves.
Corporation
Management: The business is owner by its stock and shareholders. Can be up to more than 50 people. The decisions may take a longer time to make, because people that run the company may not do what the owners want, so there is a problem between owner's wants and the management. Yet, they also have the ability to hire highly specialized individuals to take care of certain departments. Legal Entity: The corporation exists separately from its owners; they are not the same thing. A corporation has its own legal identity. Profit: Raising Money: Can grow money rapidly because they have access to more resources. They can issue stocks, which means more money, and can also borrow much more from the bank. Life: Unlimited lifespan. It can exist indefinitely and can exist even past the life of the owner. Liability: Has limited liability, meaning the owners cannot be sued, but could lose profit or the investment they made. The company is its own person, able to be sued. The owners themselves are not responsible for the debt of a corporation.
