Unit 1 · Topic 1.7 · about 35 minutes
Organization, Roles, and Responsibilities
Choose a form of business organization by weighing control, liability and access to funding, and say which leader or department in a larger business handles a given job.
Predict first
Dana runs her bakery as a sole proprietorship. After three hard years, the bakery closes for good.
- It owes its flour supplier $40,000.
- The business has $10,000 left to put toward that debt.
Who is responsible for the rest?
Four ways to organize a business
There are four major types of business organization:
- a sole proprietorship, with one owner;
- a partnership, with two or more owners;
- a limited liability company (LLC), with one owner or several;
- a corporation, owned by shareholders, who elect a board of directors.
Choosing among them means trading off control, liability and access to money.
Control and profits. Owners of a sole proprietorship, a partnership or an LLC keep control over decision making and keep the profits. For a small business owner, those profits are how the business pays them.
Liability. Sole proprietors and partners are personally liable for all business debts and obligations. Organizing as an LLC lets owners avoid personal liability for the business's debts. In a corporation, the company itself, rather than its individual owners, is liable for business debts.
Funding and growth. Sole proprietorships, partnerships and LLCs have less access to funding, which can limit how far the business grows. Corporations typically have greater access to funding and more ability to grow. The price is control. In a corporation, decisions belong to the shareholders and the board of directors they elect, and the company, not the individual owners, controls the profits. Owners who sell shares to raise money cede part of that control to the new shareholders.
| Type | Who controls decisions | Who controls profits | Owners personally liable for business debts? | Access to funding |
|---|---|---|---|---|
| Sole proprietorship | The owner | The owner | Yes | Less, which may limit growth |
| Partnership | The partners | The partners | Yes | Less, which may limit growth |
| LLC | The owner or owners | The owner or owners | No | Less, which may limit growth |
| Corporation | Shareholders and an elected board of directors | The company | No; the company is liable | Typically greater, with more ability to grow |
Worked examplePicking a form, then outgrowing it
Marcus and Lena are opening Two Rivers Kayak, which will rent kayaks and run guided trips. They will make decisions together. They are covering the $250,000 startup cost with their savings and with credit from their kayak supplier, which will let them pay for the fleet over three years. If the business fails, the rest of that debt still has to be paid. Which form of organization fits best now, and what might change later?
Rule out personal liability. As partners, Marcus and Lena would each be personally liable for everything still owed to the supplier and for every other business debt. If the business failed, their personal savings and property would be at risk.
Check control. They want to make the decisions and keep the profits themselves. In a corporation, decisions would run through a board of directors and the company would control the profits. They also do not need a corporation's access to funding yet.
Choose. An LLC gives them what a partnership would, control and profits, while avoiding personal liability for the business's debts.
Look ahead. Eight years later, Two Rivers wants 20 locations across the Midwest, which will take about $15 million. LLCs have less access to funding, so raising that much would be hard. Becoming a corporation and selling shares would open up more funding, but Marcus and Lena would cede part of their control to the new shareholders and the board they elect.
An LLC now. A corporation later, if they decide that growing to 20 locations is worth giving up some control.
Many roles, one or two people
A sole proprietor has primary responsibility for every part of the business, which means playing several roles at once. Kiara runs a one-person mobile dog grooming business out of a van. She is the chief executive officer (CEO) deciding whether to add a second van, the marketer posting before-and-after photos and setting prices, the product developer creating a nail-care add-on, the financial manager paying off the van loan and budgeting for supplies, and the operations manager planning routes so she can fit in six dogs a day.
Partners also have primary responsibility for all aspects of their business and play multiple roles, but they can split them. They typically divide the roles according to each partner's strengths and interests. In a two-person landscape design partnership, the partner who loves plants and drawing designs the yards and runs the crew. The partner who is good with numbers and people writes the bids, sends the bills and brings in new clients.
How a growing business organizes
As a business grows in size and complexity, a handful of people can no longer manage every part of it well. It needs more employees with specific skills, so many businesses organize roles and responsibilities into specialized departments, also called teams. Each department is responsible for one functional area of the business and develops expertise in it, and that expertise helps the business meet customer needs and wants efficiently and effectively.
Large businesses also add layers of leadership.
- Executive leaders, such as the CEO, are responsible for the business's overall vision, operations, strategy and performance.
- Managers lead the specialized departments and report to the executive leaders.
- In a corporation, the executive leaders report to the board of directors and the shareholders.
| Department | What it does | An example task | Jobs you might find there |
|---|---|---|---|
| Sales and marketing | Conducts market research, develops sales strategies, manages brands and builds customer relationships to attract and retain customers | Surveys customers about why they switched to a rival | Market research analyst, sales representative |
| Research and development (R&D) | Innovates around new and existing goods, services and processes to better meet customers' needs and wants | Designs a longer-lasting battery for next year's model | Product designer, research scientist |
| Operations | Manages the technical process of manufacturing goods or developing services to get products to customers | Runs the assembly line and schedules shipments | Production supervisor, logistics coordinator |
| Accounting | Tracks expenditures and earnings and prepares financial statements to monitor the business's financial health | Prepares the quarterly income statement | Accountant, bookkeeper |
| Finance | Secures and manages the use of funds, and uses financial data to recommend strategies for improving performance | Recommends whether to borrow or sell shares to pay for a new factory | Financial analyst, treasurer |
| Human resources (HR) | Recruits, trains and oversees the evaluation of employees so the business has a workforce with the knowledge, skills and abilities it needs | Runs a hiring fair and a training week for new employees | Recruiter, training coordinator |
Sort it
Four of the departments are easy to mix up. Tap a task, then tap the department that does it.
Sales and marketing
Research and development
Accounting
Finance
Outsourcing
Sometimes the best team for a job works for a different company. A business outsources a function, paying another business to perform it, when that is likely to increase efficiency or reduce costs.
The business may lack employees with the specific skills. A 20-person law office has no one trained in computer security, so it pays a security firm to protect its network and client files.
Or its own labor costs for the work may be high. Wildwood Apparel, an online clothing brand, packs and ships its own orders. A fulfillment company, a business that stores, packs and ships products for other businesses, offers to take over.
- Wildwood's own cost per order: $6.20
- The fulfillment company's price per order: $4.50
- Savings on 30,000 orders a year: 30,000 times 1.70 = $51,000
Check your understanding
Three friends are starting a food truck business. They want to keep control of every decision and keep the profits, and they do not want to be personally liable for the business's debts. Which form of business organization fits best?
Haven Home Goods, an LLC with eight stores, plans to become a corporation so it can raise $20 million and expand nationally. Which trade-off are its owners accepting?
Ana and Ben open a bakery as partners. Ana is a trained pastry chef who loves inventing recipes. Ben worked six years as a bank teller and enjoys managing money and talking with customers. How would they most likely divide the roles?
A running shoe company is planning a waterproof trail shoe. Before setting a price, it surveys 500 runners in three cities about how much they would pay for one. Which department would most likely run this survey?
Pixel & Pine, a 12-person web design firm, pays an outside payroll company to calculate its paychecks and file its payroll taxes. Which reason best explains this decision?
Course alignment, for teachers
AP Business with Personal Finance topic 1.7, Unit 1: Businesses, Competition, and New Ideas.