Chapter 3 - Chapter 3 Forms of Business Organizations...

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Chapter 3 Forms of Business Organizations Alternatives for Organizing a Business Whether small or large, every business fits one of three categories of legal ownership: sole proprietorships, partnerships, and corporations. Sole Proprietorships o The most common form of business ownership, the sole proprietorship is also the oldest and the simplest because no legal distinction separates the sole proprietor’s status as an individual from his or her status as a business owner. Although sole proprietorships are common in a variety of industries, they are concentrated primarily among small businesses such as repair shops, small retail outlets, and service providers, such as painters, plumbers, and lawn care operations. o Sole proprietorships offer advantages: They are easy to form and dissolve. A sole proprietorship offers management flexibility for the owner, along with the right to retain all profits after payment of personal income taxes. Retention of all profits and responsibility for all losses give sole proprietors the incentive to maximize efficiency in their operations. Minimal legal requirements simplify entering and exiting a sole proprietorship. Usually, the owner must meet only a few legal requirements for staring one, including registering the business or trade name and taking out any necessary licenses. The ease of dissolving a sole proprietorship is an attractive feature for certain types of enterprises. This advantage is particularly important for temporary businesses set up to handle just a few transactions. Ownership flexibility is another advantage of a sole proprietorship. When the owner can make management decisions without consulting others, take prompt action when needed, and keep trade secrets. o Disadvantages: A disadvantage of the sole proprietorship form is the owner’s personal financial liability for all debts of the business. Also, the business must operate with financial resources limited to the owner’s personal funds and money that he or she can borrow. Such financing limitations can keep the business from expanding. Another disadvantage is that the owner must handle a wide range of management and operational tasks; as the firm grows, the owner may not be able to perform all duties with equal effectiveness. A sole proprietorship lacks long-term continuity, because death, bankruptcy, retirement, or a change in personal interests can terminate it. These limitation scan make potential customers nervous about
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buying major goods or services from a sole proprietorship. Partnerships
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This note was uploaded on 05/03/2008 for the course BUS 101 taught by Professor Rollins during the Spring '08 term at Miami University.

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Chapter 3 - Chapter 3 Forms of Business Organizations...

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