Business Organization Lecture Part 1

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Complete Video Transcript

0:00This is the video lecture on business organization. In this video we’re going to talk about different
0:08types of business organizations talk about the different options and also a little bit
0:14about the advantages and disadvantages because none of these are actually perfect they all
0:20have their ups and downs and it’s really up to the business itself to decide the best
0:25way to organize. So if you want to overview business types they’re basically four main
0:33business types that we’re going to talk about in this lecture. The first type is the sole
0:41proprietorship then we going to talk about the partnership then limited partnership and
0:47then finally corporation. So the first type of business is a sole proprietorship. This
0:55is a very popular and very common way to organize business and if you want to define a sole
1:03proprietorship it’s actually very simple and very easy to define. It is essentially a business
1:11with only one owner. Thats really the key defining characteristic and of course like
1:17I said it’s a very common type business. There are probably more sole proprietorships than
1:24any other type business and also it’s a very straightforward in very simple way to organize
1:32a business. So if you decide to organize proprietorship what are the advantages. Well there’s really
1:40two big advantages. The first Advantage’s total control as the sole proprietor alternately
1:48you have the final say in all the decision-making and it�s up to you if you would like to
1:55consult with other people and get there advise and listen to their suggestions but alternately
2:02you do have the final say so you do have their total control. Then the other positive would
2:10have to do with profits. If the business is a success and if after paying out all your
2:17experiences it does turn a profit you actually get to keep all their profit for yourself
2:23as the sole proprietor. So both of those would be to tremendous advantages of that form business
2:32but at the same time everything has its disadvantages and a proprietorship definitely has several
2:39those. First to all you are limited in terms of financing. As the sole owner you would
2:48be limited to just the money that you could come up with is an individual so that’s a
2:54limitation. It doesn’t necessarily mean that you will have a successful business but it
3:00does mean that it would be hard at least initially to come up with a tremendous amount of financing.
3:08Also limited ideas being the only owner you have certain experiences you have certain
3:14ideas but you could be somewhat limited in terms of the scope. Another big disadvantage
3:21will have to do with losses and just like we spoke earlier about profits if the sole
3:28proprietor receives all the profits then it stands to reason that they would also be responsible
3:33for all the losses. So if some unfortunate reason happens to strike and you do actually
3:40lose money you would be completely responsible for all those losses. Then in that gets us
3:47down to the final disadvantage which is perhaps the biggest and that is the fact that as a
3:53sole proprietor you do face unlimited liability. When you see that phrase unlimited liability
4:02the key word is liability. See to be liable means to be responsible so if you face unlimited
4:12liability that means there’s potentially no end to the extent to which you might be held
4:18responsible and not only could you lose business assets and the money that you invested in
4:26the business but there’s potentially no end and you could even potentially lose personal
4:32property in personal assets as well. So that is a pretty tremendous disadvantage to the
4:40proprietor form of business. Now moving on to another type. You also have the option
4:48have organizing as a partnership. A Partnership, if you wanted a very clear and very simple
4:55definition, would simply be a business that has more than one owner. So it could be two
5:03could be two hundred it doesn�t really matter but it is a situation partnership with multiple
5:09owners more than one. Just like a proprietorship this is a pretty common form of business a
5:17pretty common way to organize a business but it is a little bit more complicated than a
5:24simple proprietorship. In terms of advantages there are several first of all you would have
5:33the ability to finance you would have the ability to raise more money because rather
5:39than being limited to just the money that you can come up with is an individual you
5:45have all the partners who could potentially contribute money to the business. You also
5:52have more potential for ideas. You have multiple people involved and they have different ideas
5:59different experiences that they could bring to the business. You also have the ability
6:05to divide losses. So rather than the situation as a proprietor where you would be responsible
6:12for all the losses in a partnership everyone takes on their equal share of the losses.
6:20Then finally the workload lot of people don’t realize until they start business what a tremendous
6:26amount of work load is involved and of course in a partnership you have the ability to split
6:32that workload up among all the partners so that can be a big advantage. In terms of disadvantage
6:41though there are several. The first would be potential for disagreements. You know you
6:47have different people involved they have different experiences different ideas and along with
6:53that they may have different opinions about how to run the company. So that could lead
7:00to disagreements and it could even lead to some pretty difficult working conditions.
7:06Then on the other side profit we talked about loss well if you get to split the loss among
7:12the partners unfortunately you have to split the profits among our partners so that’s a
7:18little bit the disadvantage. Again just like before with proprietorship you do also face
7:26the unlimited liability and then you also face and new disadvantage and this is an advantage
7:34that you see many times with partnerships this is called mutual agency. This is both
7:41an advantage and a disadvantage because in a partnership all the partners have the authority
7:48to conduct business on behalf of the partnership. Well that could be a good thing but at the
7:54same time it could be a disadvantage because the various partners to go out there and take
8:01on additional clients go out there and make purchases and make decisions that may not
8:07necessarily be in the best interest of the partnership and because of that mutual agency
8:14and the fact that all the partners have that authority to be an agent of the business whatever
8:20decisions they make you’re stuck with it. So if they go out and purchase things they
8:25go out and take on additional clients you know if they do things that are beyond the
8:30capabilities of the partnership you’re going to be held accountable held responsible so
8:36that could be a problem potentially. Another option for organizing a business would be
8:44to organize as a limited partnership. This is a variation on the classic partnership
8:51format. In this type of organization you actually would have two different types of partners.
8:59You would still have the general partners just like we talked about before on a partnership
9:06but you also have a new classification and those would be the limited partners. Now these
9:13limited partners they’re going to be involved they’re going to contribute money they’re
9:19going to be somewhat involved in the decision-making and if we are profitable they will certainly
9:26share in the profits then again if we lose money they’ll have to take their share the
9:31loss but ultimately the big advantage for the limited partner is that they only face
9:38limited liability so they are held accountable but only in a very limited way. In fact worst
9:47case scenario a limited partner would only lose the business assets the money that they
9:53have advanced and have provided to the business their personal assets would actually be off
10:00limits. So there can be a very attractive way for someone to get involved with the business
10:07without taking such a huge risk. So that’s another way to organize business.