Types of Business Organizations

Compare the main types of business organization:

Sole proprietorship, partnership, corporation, and franchise

Sole Proprietorship

• Owned by one person

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• Examples
• Floral shops
• Bookstores
• Farms

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• Advantages
• Easy to start
• Owner is his/her own boss
• Owner keeps all profits

• Disadvantages
• Owner must pay for everything needed for the business
• Difficult to obtain capital needed to start
• Owner might lack business skills
• Unlimited liability—owner has full responsibility for company’s debts and can lose entire investment as well as personal assets

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Partnership

• Owned by two or more people
• Examples
• Law firms
• Medical practices
• Auto Body Repair
• Advantages
• Relatively easy to start
• Easier to obtain capital than in a sole proprietorship
• Partners share skills and talents
• Partners share risks

• Disadvantages
• Partnership agreement is needed to start
• Partners might not get along well
• Partners must share profits
• Partnership must be reorganized if one partner quits
• Partners share unlimited liability—all partners share the responsibility of a bad decision made by one partner (including debts)

Corporation

• Owned by many people—stockholders, but treated by law as one person (can own property, pay taxes, make contracts)
• Advantages
• Corporations can raise money by selling stock
• Limited liability—stockholders can only lose what they have invested
• Corporation continues when stockholders sell stock
• Corporation can always make money by selling more stock

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• Examples
• Nike
• Microsoft
• Google
• Disadvantages
• Corporations are taxed on their profits
• Government closely regulates corporation
• More difficult to start a corporation
• Must obtain a corporate charter from the state in which headquarters is located

Franchise

• Franchise is a contractual agreement to sell a company’s products or services in a specific geographic area
• Advantages
• Easy to start
• Franchisee can rely on good name and expertise of the parent company
• Franchisee can get needed guidance in operating the business from franchisor

• Disadvantages
• Some franchisors are strict about how the business is run
• Franchise is limited in what products or services can be sold
• Franchise must operate like every other franchise
• Examples
• Taco Bell
• Papa’s Pizza
• McDonald’s