This document summarizes different business organizational forms available in the United States, including sole proprietorships, partnerships, corporations, limited liability companies, and not-for-profit organizations. It describes the key characteristics of each form such as ownership structure, taxation, liability, and ease of formation/maintenance. Examples are also provided to illustrate concepts like partnership liability and fiduciary responsibility.

1. Chapter 20
Business Organization
Copyright © 2016 McGraw-Hill Education. All rights reserved.
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Copyright © 2016 McGraw-Hill Education. All rights reserved.
Organizational FormsBusinesses are generally structured as:
Sole proprietorshipPartnershipCorporationLimited liability
company (LLC)While different states have variations on the
above forms, the descriptions and discussion that follow
generally apply to all businesses in the United States.
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Learning Outcome 20-1: Identify the business organizational
forms available in the United States whose purpose is to earn a
profit.
Page: 322
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Copyright © 2016 McGraw-Hill Education. All rights reserved.
Sole ProprietorshipA Sole Proprietorship is a business owned
and operated by one person. Advantages:Extremely easy to

2. form.Owner has complete authority (within the boundaries of
the law).Owner can be creative.All profits flow directly to the
owner.Easy to dissolve the business if necessary.
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Learning Outcome 20-2: Define sole proprietorship and discuss
its advantages and disadvantages.
Page: 322
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Sole Proprietorship (cont.)Sole Proprietorship
Disadvantages:Owner has unlimited liability. Owner’s assets are
at risk.Difficulty in raising money to finance the operations of
the business.
20-*
Learning Outcome 20-2: Define sole proprietorship and discuss
its advantages and disadvantages.
Page: 322
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PartnershipA partnership is business owned and operated by two
or more persons. Shares of partners might be equal, or vary
according to an partners’ contract/agreement.Dissolution per
agreement occurs due to:The death or disability of one of the
partners.The expulsion of one of the partners.Illegality of the
partnership’s business.The retirement of one of the partners.The
bankruptcy of the business.

3. 20-*
Learning Outcome 20-3: Define partnership and discuss the
advantages and disadvantages of organizing as a partnership, as
well as the advantages and disadvantages of being a limited
partner.
Page: 323
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Copyright © 2016 McGraw-Hill Education. All rights reserved.
Partnership (Cont.)Dissolution of partnership followed by a
winding-up period, during which there is an orderly liquidation
of the partnership assets.Joint venture: Individuals become
partners for only a short period of time or for only a single
project. The Uniform Partnership Act (UPA), which governs
partnerships, has been adopted by the majority of states.
20-*
Learning Outcome 20-3: Define partnership and discuss the
advantages and disadvantages of organizing as a partnership, as
well as the advantages and disadvantages of being a limited
partner.
Page: 323
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Copyright © 2016 McGraw-Hill Education. All rights reserved.
Partnership (cont.)Advantages: Each partner has the right to
share in the profits of the business.Each individual partner will
be responsible for paying the income taxes on those profits (or
deduct losses). Each partner also has a right to share in the

4. value of the firm’s assets; all business assets are owned jointly
by all partners.Easy to form and owners have complete authority
for the running of the business.
20-*
Learning Outcome 20-3: Define partnership and discuss the
advantages and disadvantages of organizing as a partnership, as
well as the advantages and disadvantages of being a limited
partner.
Page: 323
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Copyright © 2016 McGraw-Hill Education. All rights reserved.
Partnership (cont.)Disadvantages:Each partner has unlimited
liability. Partners have joint and several liability.Partners may
disagree on how the business should be run.
20-*
Learning Outcome 20-3: Define partnership and discuss the
advantages and disadvantages of organizing as a partnership, as
well as the advantages and disadvantages of being a limited
partner.
Page: 323
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Copyright © 2016 McGraw-Hill Education. All rights reserved.
Example: PartnershipFacts:Petrillo and Patel co-owned a bakery
as equal general partners.Petrillo responsible for sidewalk in
front of store. Petrillo failed to remove ice from sidewalk, a
pedestrian slipped and injured her leg. The pedestrian sued only

5. Patel.Patel liable to pedestrian and could recoup losses by suing
Petrillo.This illustrates risk of partnership and why it’s
important to have liability insurance.
20-*
Learning Outcome 20-3: Define partnership and discuss the
advantages and disadvantages of organizing as a partnership, as
well as the advantages and disadvantages of being a limited
partner.
Page: 324
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Copyright © 2016 McGraw-Hill Education. All rights reserved.
Limited PartnershipA limited partnership is a business in which
there are one or more general partners and one or more limited
partners. Limited partnerships receive the same tax treatment as
all partnerships. Authority, dissolution, and so forth are
governed by the partnership contract.
20-*
Learning Outcome 20-3: Define partnership and discuss the
advantages and disadvantages of organizing as a partnership, as
well as the advantages and disadvantages of being a limited
partner.
Page: 324
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Copyright © 2016 McGraw-Hill Education. All rights reserved.
Limited Partnership (cont.)Limited Partnership - Advantages:
Personal liability is limited to each partner’s investment in the

6. business.Disadvantages:Each partner may not be able to
participate in overall management of business, lest he or she
deemed by courts to be a general partner, and lose his or her
limited liability.
20-*
Learning Outcome 20-3: Define partnership and discuss the
advantages and disadvantages of organizing as a partnership, as
well as the advantages and disadvantages of being a limited
partner.
Page: 324
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Copyright © 2016 McGraw-Hill Education. All rights reserved.
Limited Liability Partnership Limited Liability Partnership
(LLP)A limited liability partnership is type of partnership used
by professionals in business together.Generally, in a LLP, all
partners have limited liability for other partners’
negligence.Common LLPs:Law firmsAccounting firmsMedical
practices
20-*
Learning Outcome 20-3: Define partnership and discuss the
advantages and disadvantages of organizing as a partnership, as
well as the advantages and disadvantages of being a limited
partner.
Page: 325
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Copyright © 2016 McGraw-Hill Education. All rights reserved.

7. CorporationA business formed as a separate legal entity.
Individuals can start a corporation by applying for a charter in
one of the 50 states. Corporations are owned by shareholders,
who purchase shares of stock in the corporation.
20-*
Learning Outcome 20-4: Explain the major characteristics of a
corporation.
Page: 325
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Copyright © 2016 McGraw-Hill Education. All rights reserved.
Corporation (cont.)Articles of incorporation: List the general
powers of the company. Bylaws: Provide rules for the meetings
of the corporation. Quorum: This is required for action to be
taken at a meeting.
20-*
Learning Outcome 20-4: Explain the major characteristics of a
corporation.
Page: 325
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Copyright © 2016 McGraw-Hill Education. All rights reserved.
Corporation (cont.)A corporation is considered a kind of legal
person, and courts have granted corporations similar
constitutional rights to those granted to individuals and other
organizations. Corporations may be required to have:A
corporate seal.Special tax identification number.
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8. Learning Outcome 20-4: Explain the major characteristics of a
corporation.
Page: 325
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Copyright © 2016 McGraw-Hill Education. All rights reserved.
Corporation (cont.)Advantages:Limited liability to
shareholders.Courts are extremely hesitant to pierce the
corporate veil.Easy for a corporation to raise capital and obtain
additional financing by issuing and selling new shares.
20-*
Learning Outcome 20-4: Explain the major characteristics of a
corporation.
Page: 325
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Copyright © 2016 McGraw-Hill Education. All rights reserved.
Corporation (cont.)Disadvantages:Corporations are required to
pay separate income taxes at a special corporate rate for any
year during which a profit is earned. Expense associated with
forming and maintaining the company.
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Learning Outcome 20-4: Explain the major characteristics of a
corporation.
Page: 325
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9. Copyright © 2016 McGraw-Hill Education. All rights reserved.
Subchapter S CorporationA corporation but with the advantage
of being taxed as a partnership. The company must comply with
tax regulations, such as the restriction that there be a limited
number of shareholders, among other requirements.
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Learning Outcome 20-4: Explain the major characteristics of a
corporation.
Page: 327
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Copyright © 2016 McGraw-Hill Education. All rights reserved.
Corporate Directors and OfficersDirectors: Voted in by
shareholders of corporation. Responsible for managing overall
strategy and operations of firm over long term.Members of the
board: The directors are members of a board. Responsible for
managing overall strategy and operations of firm over long
term. Officers: Directors appoint officers. Exercise control over
normal, routine matters that arise on daily basis. Examples:
President, vice president and others.
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Learning Outcome 20-4: Explain the major characteristics of a
corporation.
Page: 327
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10. Copyright © 2016 McGraw-Hill Education. All rights reserved.
Fiduciary ResponsibilityDirectors and officers exercise
authority while working under duty of loyalty and duty of
care.Duty of LoyaltyA director has legal and ethical obligation
to administer affairs of corporation with personal integrity,
honesty, and candor.Example: Directors prohibited from
advancing own personal or outside business interests at
corporate expense.
20-*
Learning Outcome 20-4: Explain the major characteristics of a
corporation.
Page: 327
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Copyright © 2016 McGraw-Hill Education. All rights reserved.
Fiduciary Responsibility (cont.)Duty of CareDirector has legal
and ethical obligation to act diligently and prudently in
conducting corporate affairs.Director responsible for selecting,
monitoring, and evaluating competent management. Director
must promote and advance policies and strategic initiatives of
firm, while at all times making certain implementation of
policies and strategies adheres to principles of law and safety.
20-*
Learning Outcome 20-4: Explain the major characteristics of a
corporation.
Page: 327
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11. Copyright © 2016 McGraw-Hill Education. All rights reserved.
Example: Fiduciary Responsibility Facts:Lennox, a partner in a
law firm, also served on board of directors for a corporation.
When the company decided to purchase a warehouse, Lennox
convinced the board of directors to hire his firm to handle the
transaction for an exorbitant fee. Lennox has breached his duty
of loyalty and violated his legal and ethical responsibilities
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Learning Outcome 20-4: Explain the major characteristics of a
corporation.
Page: 327
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Copyright © 2016 McGraw-Hill Education. All rights reserved.
Limited Liability Company (LLC)A relatively new
organizational form recognized by all 50 states.It is taxed like a
partnership for federal tax purposes (state laws vary in terms of
state tax treatment). The members (owners) act as a
management team and share in the overall control of the
business.
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Learning Outcome 20-5: Describe limited liability companies.
Page: 328
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Copyright © 2016 McGraw-Hill Education. All rights reserved.
Limited Liability Company (cont.)Laws governing the

12. formation of LLCs vary from state to stateGenerally, to
organize an LLC, members draft an operating agreement that
serves to govern the business in important matters. Operating
agreements cover topics such as how the LLC will be managed,
the members’ rights and responsibilities, and how the LLC will
be dissolved.
20-*
Learning Outcome 20-5: Describe limited liability companies.
Page: 328
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Copyright © 2016 McGraw-Hill Education. All rights reserved.
Limited Liability Company (LLC)Advantages:The LLC provides
all members with limited liability, while allowing them to
participate in the management of the business.The LLC is
treated in the same manner as a partnership by the IRS.Members
can avoid double taxation of earnings.In most states, an LLC is
quite easy to form.
20-*
Learning Outcome 20-5: Describe limited liability companies.
Page: 328
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Copyright © 2016 McGraw-Hill Education. All rights reserved.
Limited Liability Company (LLC)Disadvantages:Owners
frequently have difficulty in raising additional funds to expand
or maintain the business. There may be times when members of
the management team may disagree on how the business should

13. be run.
20-*
Learning Outcome 20-5: Describe limited liability companies.
Page: 328
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Copyright © 2016 McGraw-Hill Education. All rights reserved.
Other Organizational FormsOrganizational forms whose purpose
is to aid society are known as not-for-profit organizations.
Examples:Charitable organizationsPolitical partiesLabor
unionsSocial clubsUniversities
20-*
Learning Outcome 20-6: Identify organizational forms that are
not business entities.
Page: 329
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