Forms of business organisations

Question 1

What is a sole proprietorship?

Answer 1

• also known as sole trader

- it is a business owned and operated by a single individual

Question 2

What are the advantages of a sole proprietorship?

Answer 2

• simple
• least and fewest regulations
• owners receive all the profits

Question 3

What are the disadvantages of a sole proprietorship?

Answer 3

• difficult to raise funds (only from own pocket or from bank, but mainly own pocket)
• unlimited liability (all firms have some kind of liability, but since only one person, that one person has the burden of all the liabilities)
• limited to life of the owner (if owner dies, business dies)
• difficult to transfer ownership (knows exact anatomy and intricacies, so new person needs to learn all knowledge of first person)

Question 4

What is a partnership?

Answer 4

• owned and operated by two or more individuals

Question 5

What are the advantages of a partnership?

Answer 5

• cheap to establish

- owners receive all profits

Question 6

What are the disadvantages of a partnership?

Answer 6

• unlimited liability
• hard to raise funds
• difficult to transfer ownership
• life limited to partners

Question 7

What is a corporation?

Answer 7

• a legally registered entity, a complete business structure

Question 8

What are the advantages of a corporation?

Answer 8

• ownership is easily transferable (since knowledge created through structured approach with lots of people, there will be plenty of people to replace CEO, etc)
• unlimited life (not dependent on the life of the people who run it e.g. Apple due to transferable ownership)
• limited liability (no single person bears everything, everyone is involved)

Question 9

What are the disadvantages of a corporation?

Answer 9

• legal formalities and disclosure requirements (government, etc make sure u follow rules and have transparency)
• 2x taxation system (taxed once when profits go to organisation, then again once it goes to shareholders)
• agency costs

Question 10

What are the three types of business organisations?

Answer 10

• sole proprietorship
• partnership
• corporation

Question 11

What is an agency cost?

Answer 11

• when employee in corporation takes action that serves their own interest over interest of firm maximising firm value e.g. CEO pussying out on risky project because he might get fired