DifferencesamongBusinessOrganizationsCorporationSoleProprietorshipPartnershipAdvantages.Control byowner Limited personal·Ability to shareworkliability·No layers of·Ability to share risks.Greater ability tomanagementraisefundss.Unlimitedpersonal. Unlimited personalDisadvantages· Costly to organizeliabilityliability.Limited ability to· Limited ability to raise·Possibledoublefundsraisefundstaxation ofincomeTable 6.1Differences amongbusiness organizationsThereisnotauniquebestbusinessstructure.Corporations benefit from limited liability but are expensive toorganize.Also, their profits may be taxed twice: once as corporate profits andagain when the profits are disbursed to investors.6@2015PearsonEducation,lnc
© 2015 Pearson Education, Inc. 6 Differences among Business Organizations There is not a unique best business structure. Corporations benefit from limited liability but are expensive to organize. Also, their profits may be taxed twice: once as corporate profits and again when the profits are disbursed to investors. Differences among business organizations Table 6.1 Sole Proprietorship Partnership Corporation Advantages • Control by owner • No layers of management • Ability to share work • Ability to share risks • Limited personal liability • Greater ability to raise funds Disadvantages • Unlimited personal liability • Unlimited personal liability • Costly to organize • Limited ability to raise funds • Limited ability to raise funds • Possible double taxation of income
Proportionsof BusinessOrganizationsSoleproprietorships4%SoleSoleproprietorshipsPartnershipsCorporationsproprietorships14%14%18%72%PartnershipsPartnerships10%26%CorporationsCorporations82%60%(a)Numberoffirms(c) Profits(b) RevenueFigure 6.1Business organizations:soleproprietorships,partnershipsandcorporationsNearly/of firms aresoleproprietorships, and just one insixis acorporationBut since larger firms tend to be corporations, most economic activitytakes placethrough them@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 7 Proportions of Business Organizations Nearly ¾ of firms are sole proprietorships, and just one in six is a corporation. But since larger firms tend to be corporations, most economic activity takes place through them. Business organizations: sole proprietorships, partnerships, and corporations Figure 6.1 (a) Number of firms (b) Revenue (c) Profits
MakingTheImportanceof Small BusinesstheConnectionMost economistsPrivate 55,000employmentargue that smallbyfirmsize500ormoreemployees(thousands 50.000ofworkers)firms are vital45,000to the healthof the economy.40,00035,000In a typical year,1-49employeesnewsmall firms30,000create 3.3 million25,00050-499employeesjobs—40% of all20,00019901995200020052010new jobscreated.Similarly, while large firms may be good at improving existingproducts, small firms are often better at creating new and innovativeproducts and services.Also, small firms are less likely to lay off workers during a recession(red bars on the graph)2015PearsonEducation,Inc.8
© 2015 Pearson Education, Inc. 8 Making the Connection The Importance of Small Business Most economists argue that small firms are vital to the health of the economy. • In a typical year, new small firms create 3.3 million jobs—40% of all new jobs created. Similarly, while large firms may be good at improving existing products, small firms are often better at creating new and innovative products and services. Also, small firms are less likely to lay off workers during a recession (red bars on the graph)
TheStructureofCorporationsandthePrincipal-AgentProblem6.2LEARNINGOBJECTIVEDescribethetypicalmanagementstructureofcorporationsandunderstandtheconceptsofseparation of ownershipfromcontrol andtheprincipal-agentproblem.@2015PearsonEducafion,lnc
LEARNING OBJECTIVE © 2015 Pearson Education, Inc. 9 The Structure of Corporations and the Principal–Agent Problem 6.2 Describe the typical management structure of corporations and understand the concepts of separation of ownership from control and the principal–agent problem
Corporate Structureand Corporate GovernanceIn soleproprietorshipsand partnerships, theowners of thefirmaretypically involved in day-to-day decisions at the firm.This is not the case for larger corporations; they usually haveseparation of ownership from control.Separation of ownership from control:a situation in a corporationin which the top management, rather than the shareholders, controlsday-to-dayoperations.Owners designate a board of directors,who appoint a chiefexecutiveofficer (CEO)to oversee day-to-day operations,perhaps along withothermembersoftopmanagement.102015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 10 Corporate Structure and Corporate Governance In sole proprietorships and partnerships, the owners of the firm are typically involved in day-to-day decisions at the firm. This is not the case for larger corporations; they usually have separation of ownership from control. Separation of ownership from control: a situation in a corporation in which the top management, rather than the shareholders, controls day-to-day operations. Owners designate a board of directors, who appoint a chief executive officer (CEO) to oversee day-to-day operations, perhaps along with other members of top management