There are three basic forms into which U. businesses have chosen to organize: proprietorship, partnership, and corporation.
1. A single individual that makes the business decisions, receives all the profits, & is legally responsible for all the debts of the firm owns a proprietorship.
a. Advantages: a proprietorship is easy to form and dissolve; all decision-making powers reside with the sole proprietor; a proprietorship is taxed only once.
b. Disadvantages: the proprietorship faces unlimited liability for debts of the firm & has limited ability to raise funds; the business normally ceases to exist with the death of the proprietor.
2. Two or more who share profits or losses owns a partnership.
a. Advantages: partnerships are easy to form, experience relatively low costs of monitoring job performance, permit more specialization than sole proprietorships, & are only taxed once.
b. Disadvantages: partnerships face unlimited liability & more difficulty in decision-making (relative proprietorship); dissolution of the partnership is usually necessary when a partner dies or leaves the partnership.
3. A corporation is a legal entity that may conduct business in its own name, just as an individual does. The owners of the corporation are its stockholders.
a. Advantages: shareholders enjoy limited liability; a corporation continues to exist even if some owners cease to remain owners; a corporation has the ability to raise large sums of money for investments.
b. Disadvantages: owners are subject to double taxation because corporations pay taxes on profits & shareholders pay taxes on dividends received; ownership & control are separated in a corporation.
i. Professional managers, who may have little or no ownership in the firm, may pursue their own, not shareholder-owner interest.
ii. Shareholders may experience high costs to monitor the behavior of professional managers.
4. Stocks, bonds, & reinvestments of retained earnings are the most important sources of corporate financing.