Unit 3 GENERAL BUSINESS ISSUES
Section 1. Types of Business Organisations
Target questions:
1. What types of business organisations do you know?
2. What are the advantages and disadvantages of each type?
There are five forms of business organisations based on the different forms of ownership. These include (1) sole proprietorships, (2) partnerships, (3) corporations, (4) joint ventures, and (5) syndicates.
Sole Proprietorship
The most common form of ownership is a sole proprietorship — that is, a business owned by one individual. These businesses have the advantage of being easy to both set up and dissolve because few laws exist to regulate them. Proprietors, as owners, also maintain direct control of their businesses and own all their profits. On the other hand, owners of proprietorships are personally responsible for all business debts and, constrained by the limits of their personal financial resources, they may find it difficult to expand or increase their profits. For those reasons, sole proprietorships tend to be small, primarily service and retail businesses.
Partnership
A partnership is an association of two or more people who operate a business as co-owners. There are different types of partners. A general partner is active in the operation of a business and is liable for all of its debts. In small businesses with only two or three owners, all will be general partners. A limited partner, by contrast, invests in a business but is not involved in its daily operations. Partnerships, like sole proprietorships, are relatively easy to establish. Furthermore, partners can pool financial resources to fund expansion, and can divide their duties and responsibilities according to personal expertise and abilities. For example, one partner may be very good at selling, while another has a knack for maintaining good financial records. As with sole proprietorships, however, partnerships may entail substantial financial risks, as all of the general partners are liable for the debts of the business. And unlike proprietorships, disagreements among partners can harm partnership businesses.
Corporation
A corporation is a legal entity that exists as distinct from the individuals who control and invest in it. As a result, a corporation can continue indefinitely through complete changes of ownership, leadership, and staffing. Current owners can sell their holdings to other individuals or, if they die, have their assets transferred to heirs. This is possible because a corporation creates shares of stock that are sold to investors. One strength of the corporate business structure is that stockholders have limited liability, as opposed to the unlimited liability of general partners, so they cannot lose more than their initial investment. Investors may also easily buy and sell stocks of public corporations through stock exchanges. By offering stock publicly, a corporation enables anyone with some money to buy the stock and become a part-owner of the company. As a result, corporations can more easily raise capital for business expansion than can sole proprietorships and most partnerships.
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Investors control a corporation through the election of a managing body, known as a board of directors. In a large corporation, investors collectively decide who will oversee the operation of the enterprise. In turn, the board chooses a president, who decides on the key company personnel and helps formulate company strategy.
Many corporations are highly successful business organizations, with profits far exceeding those of many sole proprietorships and partnerships. However, they traditionally have higher tax burdens than other kinds of businesses. Also, the fees involved in creating and organizing a corporation can be expensive.
Joint Ventures and Syndicates
In joint ventures and syndicates, individuals or businesses cooperate to create a single product or service package. A joint venture is a partnership agreement in which two or more individual – or group – run businesses join together to carry out a single business project. For example, U.S.-based General Motors Corporation and Toyota Motor Corporation of Japan have a joint venture called New United Motor Manufacturing, Inc., created for the purpose of producing cars in California.
Asyndicate is an association of individuals or corporations formed to conduct a specific financial transaction such as buying a business. Quite often syndicates are created for the purpose of buying sports franchises. For example, the Miami Heat basketball team and the New York Yankees baseball team are each owned by syndicates of individuals. Each member of these syndicates is also involved in the operation of other businesses.
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