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What are the three types of firms? Explain the major advantages and disadvantages of each.
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The three main ways of organizing a firm have both advantages and disadvantages:
· Proprietorship.
ADVANTAGES—easy to set up; managerial decision-making is simple and rapid; and profits are taxed only once.
DISADVANTAGES—bad decisions on the part of the owner are not subject to review; the owner’s entire wealth is at stake because of unlimited liability; the firm dies with the owner; and acquiring capital and labor is expensive.

· Partnership.
ADVANTAGES — easy to set up; has diversified decision-making so that more than one
person’s expertise can be utilized; can survive the death or withdrawal of a partner; and profits are taxed only once.
DISADVANTAGES—all the owners’ wealth is at risk because of unlimited liability; if there are many partners, gaining a consensus about managerial decisions may be difficult; the withdrawal of partner may create capital shortage; labor costs are high compared to corporations; and capital costs can be high.

· Corporation.
ADVANTAGES—perpetual life; limited liability for its owners; readily available, large- scale, and low-cost capital; can rely on professional managers rather than the talents of the owners; and reduced costs from long-term labor contracts.
DISADVANTAGES—potentially complex management structure may lead to slow and expensive decision-making; and profits are taxed twice, once as corporate profit and once as income to the stockholders.
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