When a proprietor wants to expand a business, one way to do it is to form a partnership, a business formed for profit by two or more co-owners. The rights and duties of a partnership are regulated by laws of the state where it is formed and by a legal agreement entered into by the co-owners. Usually an agreement specifies the amount of the money each is investing and duties each partner assumes. A partnership agreement also may provide for a «silent partner» who does not take part in the management, but who invests money in the business.
The partnership has the advantage of pooling managerial talent. One partner may be qualified in production, another in marketing. The partnership, like individual ownership, is exempt from most of the reporting that the government requires of corporations. Furthermore, it has a favorable tax position when compared with the corporation. Federal taxes are paid by individual partners on their share of earnings; beyond that the business is not taxed.
A major disadvantage of the partnership is that each member is liable for all the debts of the partnership; the act of any partner is legally binding upon the others. If one partner takes a large amount of money from the business and squanders it, the others must pay the debt. Partnerships suffer another major disadvantage: decision-making is shared. If partners have serious and constant disagreements, the business is bound to suffer.
Nonetheless, the partnership remains a vital part of the overall business economy.
Large Corporations in the USA
Although there are many small and medium-size corporations, bigger business units are needed to perform certain services in the vast economy. Large corporations can supply goods and services to a greater number of people across a wider geographic area than small businesses. They serve consumers across the nation and across the world. Corporate products tend to cost less per unit sold. Moreover, consumers benefit from the availability of corporate «brand names», which they recognize as guaranteeing a certain level of quality wherever purchased.
Large corporations also have the financial strength to research, develop and produce new goods. Their scientific know-how, innovation and technical capability are critical to maintaining the nation's competitiveness and productivity.
In the United States, a corporation is a specific legal form of organization of persons and resources chartered by one of the 50 states for the purpose of conducting business. When people and resources are brought together, the result in the eyes of the law - is a person (Indeed, the Latin word «corpus» means «body» or «person»). A US corporation, distinct from any individual human being, may own property, sue or be sued in the court and make contracts. For this reason, a corporation is an ideal vehicle for the conduct of business by many smaller enterprises as well as larger ones.
Advantages and Disadvantages of Corporations
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The corporate form of business is more flexible instrument for large-scale economic activity than the sole proprietorship or partnership.
First, because the corporation itself has legal standing, it safeguards its owners, relieving them of individual legal responsibility when they act as agents of the business.
Second, the owners of shares of stock have limited liability; they are not responsible for corporate debts. If a share-holder paid $ 100 for 10 shares of stock and the corporation goes bankrupt, he or she can only lose $ 100 invested.
Third, corporate stock is transferable. Thus, the corporation is not damaged by the death or disinterest of a particular person. An owner of stock can sell his or her holdings at any time or pass the stock along to heirs. Yet, the corporate business organization has drawbacks as well as benefits.
One disadvantage relates to the taxation. As a separate legal entity, the corporate may pay taxes. Unlike the treatment of interest on bonds, dividends paid to shareholders are not a tax-deductible business expense for the corporation. When the corporation passes along profits to individuals in the form of dividends, the individuals are taxed again on these dividends. This is known as «double taxation».
Another cost results from the fact that ownership becomes separated from management. While this makes management easier, some managers are tempted to act more in their own interests than of the stockholders.
Money
Money is the heart of business. Money is needed to pay wages, to acquire materials to make up into manufactured goods and to reward those who attempt to anticipate the needs of society and stand to lose if they fail to do so. Money is lubricant which allows the diverse elements in the economic system to interact effectively. If a business runs short of money in the private sector it will be wound up (if a company) or closed down (if the proprietor is bankrupted). People will lose their jobs and the flow of goods and/or services it has been providing will dry up. Money is the life blood of business and executives of all types will find much of their time and energy devoted to coping with problems of a financial nature. Finance becomes critical when a business is being first set up; when expansion is planned or when a shortage of working capital is developed.
Without money business would be impossible. It is needed to pay wages, buy raw materials and to reward successful entrepreneurs. If there is a shortage of money, the business will collapse. There will be no production, no jobs. That is why the executors spend so much time dealing with financial problems.
Corporate Finance
Corporations need financing for the purchase of assets and the payment of expenses. The corporations can issue shares in exchange for money or property. Sometimes it is called as equity funding. The holders of the shares form the ownership of the company. Each share is represented by a stock certificate, which is negotiable. It means that one can buy and sell it. The value of a share is determined by the net assets divided by the total number of shares outstanding. The value of the share depends on the success of the company. The greater the success, the more value the shares have.
A corporation can also get capital by borrowing. It is called debt funding. If a corporation borrows money, they give notes or bonds. They are also negotiable. But the interest has to be paid out whether business is profitable or not.