Economics: Business Models, Sole Proprietorship, Partnerships, and Corporations
Business Models:
Hey Class, here is a summary of the types of business models we discussed in class during the week of 3/7/16
Are Objectives included:
SMALL BUSINESS
Most business in the United States are Sole Proprietorship. This is the simplest form of ownership for a sole owner and requires little more than a tax ID number. This business model offers maximum freedom, but also has the risk of unlimited liability or in other words unlimited financial responsibility. On the positive side, the owners profits are only taxed once.
Corporations raise money or capital by selling stocks or bonds. When a person buys stock, he becomes a partial owner. When he buys bonds, he loans money to the corporation and must be repaid. When a business is incorporated, stocks are generally sold to acquire capital for various reasons. The capital raised by selling stocks can be used for many purposes such as to purchase resources, to buy out a competing business or simply to grow the business. By buying stocks, individuals become partial owners of the corporation and share in the profits by payment of dividends. Dividend payments are based on the amount of stock you own in a company. Another way that investors make money with a corporation is when the company is doing well the price of the stock might go up, thereby increasing the value of the stockholders original investment.
Hey Class, here is a summary of the types of business models we discussed in class during the week of 3/7/16
Are Objectives included:
- Explaining the difference between a small and large business model
- Recognizing the key aspects of the corporate mode.
SMALL BUSINESS
Most business in the United States are Sole Proprietorship. This is the simplest form of ownership for a sole owner and requires little more than a tax ID number. This business model offers maximum freedom, but also has the risk of unlimited liability or in other words unlimited financial responsibility. On the positive side, the owners profits are only taxed once.
A Partnership is the easiest business organization type to create, as it only requires an agreement, which can be verbal or written. In a partnership, the owners manage and control the business, and all revenue flows directly through the business to the partners, who are then taxed based on their portions of the income. One of the most important benefits of a partnership is division of labor and responsibilities. Unfortunately, the partners are personally liable for debts and any liabilities that result from the operation of the business. In other words unlimited liability.
When one partner leaves the business, it is dissolved unless there is an agreement in place that allows it to continue. A business continuation agreement typically stipulates the terms under which a partner can transfer his share of the business for some financial consideration. The same agreement should provide for the transfer of a deceased partner's share so the surviving family members receive fair compensation from the remaining partners.
CORPORATIONS
A public corporation is a legal entity owned
by individual stockholders and run by a board of directors, usually elected by
the stockholders in general or appointed by a majority shareholder. Many of the most recognized companies are
public corporations such as Apple, Home Depot, and Microsoft. The original owners or founders of the company may not run the corporation as they may longer be majority owners of the business.
Conversely, a private corporation is one that does not issue stock to the public and may be owned by one family. An example would be the hamburger chain, White Castle Management Company that is owned by the Ingram family. A corporation is considered a separate entity apart from its owners. As such, the corporation can be sued but individual stockholders cannot be sued. Therefore owners of a corporation have a limited amount of liability. A multinational corporation (MNC) is a corporation that operates in different countries, such as General Electric. Because multinationals are based in many countries they must employ a large support team to navigate local laws and customs.
Conversely, a private corporation is one that does not issue stock to the public and may be owned by one family. An example would be the hamburger chain, White Castle Management Company that is owned by the Ingram family. A corporation is considered a separate entity apart from its owners. As such, the corporation can be sued but individual stockholders cannot be sued. Therefore owners of a corporation have a limited amount of liability. A multinational corporation (MNC) is a corporation that operates in different countries, such as General Electric. Because multinationals are based in many countries they must employ a large support team to navigate local laws and customs.
A major drawback concerning corporations is double taxation. Double taxation means that after corporations pay taxes on their profits, individual stockholders pay taxes on their dividends. Profits are taxed twice! Some corporations recognize the benefit of working with another similar company and may decide to merge. A merger occurs when one business acquires another business. The government carefully monitors mergers. Other drawbacks to incorporating include:
- Maintenance of various types of meetings and record keeping.
- Complex Tax Filing- Corporations have to file its own tax return and is a taxable entity (except for “S” Corporation which has to file its own tax return but is not a taxable entity, profit and loss pass through shareholders).
- Expense initial startup costs and operating fees.
Raising Capital
Corporations raise money or capital by selling stocks or bonds. When a person buys stock, he becomes a partial owner. When he buys bonds, he loans money to the corporation and must be repaid. When a business is incorporated, stocks are generally sold to acquire capital for various reasons. The capital raised by selling stocks can be used for many purposes such as to purchase resources, to buy out a competing business or simply to grow the business. By buying stocks, individuals become partial owners of the corporation and share in the profits by payment of dividends. Dividend payments are based on the amount of stock you own in a company. Another way that investors make money with a corporation is when the company is doing well the price of the stock might go up, thereby increasing the value of the stockholders original investment.
Questions that you should be prepared to answer on the T.A.S.C. might included:
- Compare a corporation to a sole proprietorship. What are the potential benefits to incorporating instead of opening a business by oneself?
- Why might someone decide to not incorporate?
- Who owns a public corporation? and what is a stock?
- How are bonds different from stocks?
- What problem does a multinational corporation face?
- Why do companies sell stocks?
- What is a dividend?
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