2_Forms of Business Organizations
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Legal status: for-profit organizations in private sector
Common
forms
Non- |
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Incorporated |
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incorporated |
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organizations |
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organizations |
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Sole proprietors |
Partnerships |
Limited |
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partnerships |
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Private limited |
Public limited |
companies |
companies |
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Corporation
Sole proprietor
is a sole person carrying out some sort of business
Trades people.
Market-stall holders.
Small independent retailers.
Cottage industry proprietors.
Farmers, etc.
The sole proprietor: unlimited liability Johnny Banana’s story
Johnny Banana is a sole proprietor who specializes in decorating and plumbing. He accepted a contract to work in a large country mansion, with the focus on redecorating and replumbing in and above the art gallery. The art gallery in the mansion was of international renown and housed several rare Renoirs and Picassos.
What the owner of the mansion didn’t realize was that Johnny was not very good at
his job. On arriving at the house, Johnny decided to start with the plumbing. He-re- routed several water and sewage pipes above the gallery and re-housed some channels under the expensive tiled floor. After this, on the second day, he started to repaint the walls on which the expensive paintings were hung.
Things stated to go wrong when he removed a Picasso from the wall to paint behind it. Laying it on the floor, he kicked over a can of paint and unfortunately most of it landed on the paining. Whilst furiously trying to wipe the paint off with some rag, one of the pipes above the gallery ruptured allowing sewage pipe, he nudged the ladders, toppling over another tin of paint, which also landed on the unfortunate Picasso. By now, the dribbling foul water causing irreparable damage to the Renoir. The copious expletives uttered by Johnny caused the mansion’s owner to entry the gallery.
The two paintings were judged to have been ruined. Johnny was advised he owed a
total of 14 million pounds in respect of the two paintings. Because Johnny was a sole proprietor, the entire value of the demand had to be met from his personal reserves. His total comprised the value of his house (30 000) and the value of his van (500), Johnny was declared bankrupt – a situation which meant that he could not take advantage of mortgages or any other loans; thus he lost his home and business with
little prospect of rebuilding either of them again.
Sole proprietor
Advantages |
Disadvantages (1) |
It’s easy to start |
Unlimited liability |
You’re the boss |
The investment |
You keep all |
capital is limited |
profits |
You need to be a |
Profit is taxed as |
generalist |
personal income |
Labour intensive |
Sole proprietor: other disadvantages (2)
Difficulties of higher-caliber employees retaining.
Poor economies scale.
Poor ability to take part in modern competition (result).
Partnership
a voluntary association of two or more persons to carry on, as co-owners, business for profit
Management consults
Lawyers and solicitors
Accountants
Architects
General practitioners, etc.
Agreement of partnership includes
Each partner’s responsibilities and authority.
The extant of each partner’s liability.
The amount of the capital each partner is investing in the business.
How profits and losses are be shared.
How disputes between the partners are to be solved.
Arrangements for the withdrawal or admission of partners.
Partnership
Advantages
It’s easy to start
More investment capital is available
Breath of skills and abilities
The burden of individual partner’s risk can be reduced
Disadvantages
Unlimited liability
Profits must be shared
Necessity of consultations and agreement between partners
Limited life
The main idea of limited liability
Investors can reduce the risk
How limited liability works
Intension to carry |
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out business activity |
Dividing business |
Shareholders |
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“Do you want |
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receive |
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small parts |
certain |
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to invest in my |
(shares) |
legal rights |
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business?” |
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If the company succeeds, the value of funds will grow as demand from the shares drives the share price upwards.
If the company fails, the shareholders lose the value of their investment