Partnerships

A partnership is an unincorporated firm that is owned by two or more people, called partners, each of whom has a financial interest in the company. Like sole proprietorships, most partnerships are small businesses. The two main types of partnerships include general partnerships and limited partnerships. In a general partnership the partners operate the business together, sharing decision making and other responsibilities. In a limited partnership, some partners run the business while others simply invest money in the firm—mainly to finance start-up costs. A silent partner invests money in the partnership but does not get involved in the day-to-day operation of the business. There are fewer partnerships in the U.S. economy than any other type of business organization. In 2008 the 3.1 million partnerships accounted for 10 percent of all firms and 14.8 percent of all business receipts in the U.S. economy, as shown in Table 5.3.[1] Partnerships are common in servicesproducing fields such as law, medicine, real estate, insurance, and engineering, and in the skilled trades such as construction and home repair.

The advantages of operating a partnership are similar to those of a sole proprietorship. First, partnerships are fairly easy to organize. Like sole proprietorships, partnerships comply with local zoning and licensing regulations. In addition, partners often draft a partnership contract to define each partner's role in the firm, determine how profits should be distributed, and state a process for dissolving the firm should the need arise. Second, decision making in partnerships is more specialized and, therefore, more expert than in sole proprietorships. Third, the quality of the service provided by the firm is improved through consultations and peer evaluations. Fourth, psychological rewards such as pride and selfesteem often accompany business success. Fifth, business profits are a direct affirmation of partners' business success. Sixth, like the proprietor's profits, the profits of partners are taxed just once as personal income.

There are also disadvantages of partnerships. First, shared decision making among partners is sometimes a source of conflict, which can be time consuming, costly, and demoralizing. Second, general partners have unlimited liability for business losses, obligations, or debts incurred by any of the partners. Thus, a poor business decision, an expensive legal suit, a product recall, or other business error can sap the personal assets of each general partner. Silent partners, however, have limited liability and, thus, their potential loss is capped at the dollar amount they invest in the firm. Third, access to credit is often limited. Like sole proprietorships, partnerships generally rely on the talents and health of a few people and often lack the collateral to back large loans from banks.

Corporations

A corporation is a firm that is a legal entity in itself and incorporated under state laws. A corporation is able to conduct business in its own name in much the same way an individual does. The owners of a corporation are its shareholders, who purchase certificates of ownership called shares or stocks. The management of a corporation, on the other hand, consists of hired professionals. Corporate management often is headed by a chief executive officer (CEO), chief financial officer (CFO), a president, a number of vice presidents, and other officers. The company's management is selected by a corporate board of directors, which also makes important policies and sets goals for the firm. In 2008 there were 5.8 million corporations operating in the U.S. economy, which represented about 18.5 percent of all business firms. Corporations generated $27.3 trillion in business receipts, or 81.3 percent of the total business receipts in the economy.[2] Measured by level of business activity, corporations are the dominant form of business organization in the U.S. economy.

Corporations are classified as public corporations or closed corporations. Most wellknown corporations are public corporations, or corporations in which stock is widely traded on a stock exchange. Examples of well-known public corporations traded on the New York Stock Exchange include AT&T, Coca-Cola, Home Depot, IBM, Microsoft, and Walt Disney. Many other nationally known public corporations are widely traded over the counter on the NASDAQ stock exchange, including Amazon, Denny's, Mattel, Staple's, Starbuck's, and TiVo. Closed corporations, on the other hand, restrict stock ownership to a small group, perhaps family members or company employees. Examples of closed corporations, also called private companies, are Koch Industries, Mars, Enterprise Rent-a-Car, Levi Strauss, and Hallmark Cards.

There are several advantages of the corporate business structure. First, the shareholders of a corporation have limited liability, so the maximum amount of money an individual shareholder could lose is the amount invested in the corporation. Second, corporations have the most specialized and expert management of any type of business organization. Third, corporations are the most stable form of business organization. This is because a change in ownership, which occurs through the sale or other transfer of stock, does not interrupt business activity. Fourth, only corporations can raise money for their business by selling bonds and stocks to investors. Bonds represent corporate debt, rather than ownership in a corporation. Investors buy bonds to earn annual interest payments for the life of this debt. Stocks represent partial ownership in the corporation. Investors gain two types of returns from investments in stocks—dividends and capital gains. Dividends, the regular payments by the firm to stockholders, are distributed from corporate profits quarterly, semiannually, or annually. Capital gains occur when the investor sells a stock for an amount greater than its original purchase price.

Disadvantages of corporations also exist. First, the division between the owners and managers of a corporation could cause conflicts over the distribution of profits, business practices, or other concerns. Second, specialized decision making is time consuming, and decisions might be delayed as they travel through a complex chain of command. Third, corporations are the most difficult type of business to form. The rules of forming corporations vary, but most states adhere to the provisions outlined in the Model Business Corporation Act. Fourth, corporations are subject to double taxation of corporate profits. Double taxation begins with the corporate income tax, which taxes corporate profits. Next, the federal personal income tax takes another bite out of these same profits when dividends are distributed to shareholders. During the Republican administration of President George W. Bush, the Jobs and Growth Tax Relief Reconciliation Act of 2003 was passed to reduce this disadvantage by placing a 15 percent tax cap on dividend income and on capital gains. During the Democratic administration of President Barack Obama, the 2010 Tax Relief Act extended the 15 percent tax rate for dividends and capital gains through 2012.

Table 5.4 Top 5 Franchises, 2013

Rank

Franchise Name

Product Line

1

Hampton Hotels

Mid-priced hotels

2

Subway

Sandwiches and salads

3

Jiffy Lube, Int'l

Fast oil change

4

7-Eleven

Convenience stores

5

Supercuts

Hair salons

Source: “Entrepreneur 2013 Franchise 500,” Entrepreneur, Entrepreneur Media, Inc., 2013.

 
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