Business Firms

Why do Business Firms Exist?

• Business firms exist when people working together can produce more than the sum of individuals working alone can produce.

• Key Terms: Business Firm, shirking, monitor, residual claimant

Types of Business Firms

• Sole Proprietorships- Single Owner

• Partnerships-Two or more who own a certain stake in business

• Corporations-Owned by Stockholders

SOLE PROPRIETORSHIPADVANTAGES

• Easy to form and to close.

• All decision-making power resides with sole proprietorship.

• Profit of the firm is taxed once.

SOLE PROPRITORSHIPDISADVANTAGES

• Unlimited liability-owner responsible for all debts incurred by the business

• Limited ability to raise funds

• Ends with retirement or death

PARTNERSHIPSADVANTAGES

• Specialization can be utilized

• Profit is to the partners and only personal income tax is applied (taxed once)

PARTNERSHIPSDISADVANTAGES

• Partners liability is unlimited

• Decision making can be complicated

CORPORATIONSADVANTAGES

• Owners (stockholders) have no liability for debts incurred by the corporation

• Continue to exist even if one or more owners sell their shares or die

• Able to raise large sums of capital

CORPORATIONSDISADVANTAGES

• Subject to double taxation

• Complicated to set up