Lesson 2.5: Business Organization
LVL I Answer the following questions as you read:
1. What are the three types of business?
2. Why do corporations typically last longer than sole proprietorships?
3. Which type of business has more liability, and why?
1. What are the three types of business?
2. Why do corporations typically last longer than sole proprietorships?
3. Which type of business has more liability, and why?
SSEMI3 Explain the organization and role of business and analyze the four types of market structures in the U.S. economy.
a. Compare and contrast three forms of business organization—sole proprietorship, partnership, and corporation with regards to number of owners, liability, lifespan, decision making, and taxation.
Sole proprietorships are firms legally owned by only one person. Partnerships are firms legally owned by two or more people. Corporations are firms legally owned by stockholders who have purchased “shares” of the company in the hope that the value of their shares will increase over time and pay dividends. Dividends are money payments distributing some of a firm’s profit to shareholders on a quarterly basis. While sole proprietorship, partnerships, and corporations are the three main ways to organize a business in the U.S., students should understand that there are many variations of these forms in real life with complex rules. The following chart provides a comparison of the three basic types of business organization. Liability refers to responsibility for paying the debts of the business. Unlimited liability means that if a business is unable to meet its financial obligations, the owner(s) of the business are personally responsible to pay those debts. This means the owner(s) could be required to liquidate personal assets such as their home to pay the debts of the company. Limited liability is when responsibility for the debts of the business are restricted to the ownership stake (shares of stock) the business owner owns. The personal assets of the shareholder are not in jeopardy. Lifespan of the business refers to what happens to the business when an owner leaves or dies. Limited life means the business closing or reorganizing a business under the new owner(s) when the previous owner(s) leave the business. Unlimited life means the business passes to new owners through the sale of shares without ending the business. Decision making refers to the entity responsible for the day-to-day operating decisions of the business. The way a business is organized affects taxation on the profits of the business. Sole proprietorships and partnerships face a single tax on their business profits as income. The amount of income they earn from their business will determine the income tax rate charged. Corporations must also pay corporate income tax on profits. The profit income distributed to shareholders in the form dividends is also taxed. This is double taxation.
LVL II APPLICATION
Complete the chart
Complete the chart