The course links this topic to personal finance, because the structure an owner picks decides how that owner earns income and how much personal risk they carry.
The key ideas
The four business structures
The four major types are the sole proprietorship, the partnership, the limited liability company (LLC), and the corporation.
A sole proprietorship has one owner who keeps all decision-making and all profit but is personally liable for the business's debts. A partnership has two or more owners who share control, profit, and liability. An LLC protects owners' personal assets from business debts while the owners keep control. A corporation is owned by shareholders and run by an elected board of directors, and the company itself is liable for its debts.
A freelance illustrator working alone is a sole proprietor. Two friends running a food truck together form a partnership. A three-person landscaping crew might form an LLC to keep their own cars and savings out of reach if the business is sued. Apple and Nike are corporations.
Control, funding, and liability trade-offs
Sole proprietorships, partnerships, and LLCs let owners keep control of decisions and profit, but they have less access to funding, so growth can be harder. Corporations usually raise more money and can grow faster, but owners hand some control to shareholders and the board.
Personal liability is the other trade-off. Sole proprietors and partners are personally on the hook for business debts. LLC owners are not. In a corporation, the company, not the individual owner, is liable and controls the profits.
If a client wins a lawsuit against a sole proprietor, a court can reach her personal savings. The same judgment against an LLC or a corporation stays with the business. A chain like Starbucks can sell shares to raise money for new stores, which a one-person coffee cart cannot do.
Roles in small and large businesses
A sole proprietor wears every hat: leader, marketer, builder, bookkeeper and operations. Partners wear the same hats but usually divide them by strength and interest.
As a business grows, it hires specialists and groups them into departments. Top executives such as the CEO run the company and set its direction. Managers lead each department and answer to the executives. In a corporation, the executives answer to the board of directors and the shareholders.
In a two-partner food truck, one partner cooks and manages supplies while the other handles social media, bookings, and the books. A restaurant chain has a marketing manager, a finance manager, and an operations manager who all report to the CEO.
Outsourcing
Outsourcing means paying another business to perform a function instead of doing it in house. A company outsources when that is likely to raise efficiency or cut cost, for example when it lacks employees with the right skills or its own labor costs are high.
A small online shop pays a fulfillment company to store and ship its orders, because building its own warehouse would cost far more. Many companies also outsource customer service calls or payroll.
The six departments
Follow a pair of wireless earbuds through a company. Research and development designs the new model. Operations manages the process that builds it and gets it to customers. Sales and marketing studies customers, sets sales strategy, manages the brand, and builds relationships. Human resources recruits, trains, and evaluates the people doing all of that. Accounting tracks what was spent and earned and prepares financial statements. Finance secures and manages funds and uses financial data to recommend strategy.
Accounting and finance is where students slip. Accounting reports on money that already moved. Finance decides what to do with money going forward.
The earbud company's accounting team records what the factory cost last quarter. Its finance team decides whether to borrow money to build a second one.
Key terms
- Sole proprietorship
- one owner who keeps full control and profit and is personally liable for debts.
- Partnership
- two or more owners who share control, profit, and personal liability.
- LLC
- a limited liability company: owners keep control and their personal assets are protected from business debts.
- Corporation
- owned by shareholders and run by an elected board; the company is liable for its debts.
- Liability
- legal responsibility for a debt or obligation.
- Outsourcing
- paying another business to perform a function instead of doing it in house.
- Sales and marketing
- researches customers, sets sales strategy, manages the brand, and builds customer relationships.
- Research and development
- works on improving what the business sells and how it makes it.
- Operations
- manages the technical process of making a good or delivering a service.
- Accounting
- tracks expenditures and earnings and prepares financial statements.
- Finance
- secures and manages funds and recommends strategy using financial data.
- Human resources
- recruits, trains, and evaluates employees.