A lot of media focuses on businesses—people work there, after all, and many a work (and indeed, at least one genre) is by definition set where people work. In most countries, that means they work at a private business of some kind, and sometimes the drama and/or comedy arises out of the way businesses are run. This Useful Note is a short guide to business organizations—the ways in which a firm (that is to say, a business, whether it's the taco truck or small ethnic grocery on the corner or a giant MegaCorp like McDonald's or Walmart) can be run.
DISCLAIMER: This note is a general introduction to business organizations. You should not use it for a test. Nor should you use it as any kind of guide for how to run a business. And most especially, TV Tropes is not a law firm and most tropers are not lawyers (and even those who are lawyers aren't acting as lawyers when they trope). Nothing on this page should be considered legal advice. If you want to use one of these forms to start a business, consult a lawyer.
Sole proprietorship
The simplest kind of business, and by far the most common. One person—the proprietor—owns the entire firm. The premises (or the lease), the equipment, the inventory, and any contracts the firm enters into with other people are all in that person's name. The proprietor doesn't have to use his/her name directly, of course, but that's what "doing business as" (d/b/a for short) is for; so if John Doe runs a pretzel shop on 9th Street, he can sign everything in the name of "9th Street Pretzel Shop," but really that just means "John Doe, but calling himself 9th Street Pretzel Shop". If you, Sammy Troper, are employed as an assistant baker at the shop, the contract is with John Doe, even if it says the contract is with "9th Street Pretzel Shop," since in they eyes of the law "9th Street Pretzel Shop" is just another name for John Doe. The proprietor takes all profits as personal income, and is fully liable for all losses. As you can imagine, this is the oldest kind of business organization—even the Ancient Egyptians would've regarded it as old news.The main advantage of sole proprietorship is pretty simple: it's simple. It doesn't require you to keep track of a lot of law or do fancy accounting or anything like that. You just do stuff, and that's your business. For the vast majority of small businesses with one owner, that's quite enough. Of course, there is a disadvantage to this: that whole "fully liable for all losses" thing. It might help to conceptualize this problem like this: Suppose John Doe takes out a $8,000 loan from the bank to buy some new pretzel-making equipment, secured by the equipment (i.e., if John fails to make payments on the loan, the bank can take the equipment, probably hoping to resell it). The day after the equipment arrives, the 9th Street Pretzel Shop catches fire and the equipment is destroyed. Obviously, John will not be able to make payments on that loan for a while (let's leave aside insurance); just as obviously, the bank can't take the equipment back (since it no longer exists). If the bank gets antsy, it might sue John on the debt, get a judgment, and then get a lien on his property—that is to say, get permission from the government to take $8,000 of John's stuff in satisfaction of the debt. It doesn't matter if the stuff is something John used in his business (like the delivery van he used to take pretzels to catering events) or something he didn't (like the money in his personal bank account or, oh, his house). That's what we mean by "full liability for all debts"—also called "unlimited liability."
That may sound like a major disadvantage, but in practical terms (which we'll explain later) it really isn't a problem for most business owners. That's why even in richer countries where it's easy to set up alternate forms of business you still see the vast majority of businesses as sole proprietorships.
In media
Most small businesses in media are probably sole proprietorships—as in reality. This is especially true of small restaurants (see, for example, Bob's Burgers or 2 Broke Girls).Partnerships
The second-simplest and second-oldest kind of business organization, and formerly nearly as common as the sole proprietorship, but now much less used. In a partnership, two or more people—called partners—pool their resources to run the firm. They split all the profits among themselves—either equally or, more usually, based upon how much money or other resources they put into the business—and also all the losses. They make all decisions by voting among themselves (again, voting may be based on "one-partner-one-vote," or be based on how much money/resources each put in). Like a sole proprietorship, this is a very simple and flexible form of organization.You'll note that the partners split the losses among themselves. This is where things get complicated:
- In a general partnership—the oldest and historically only way to have a partnership—all partners have unlimited liability. For instance, if John Doe lets his brother Jimmy buy into the pretzel shop, the business becomes a partnership. If John goes out and gets that $8,000 loan to buy the equipment, and the shop burns down and destroys the equipment, the bank (if it gets antsy) can not only go after John's stuff, but Jimmy's stuff as well—even if Jimmy didn't know about the new equipment or was opposed to John buying it. The bank could even go after Jimmy's stuff and only Jimmy's stuff to satisfy the debt. Again, this isn't terribly important for most businesses compared to the ease of establishing one—especially considering that a general partnership requires literally no official paperwork to establish in most jurisdictions.
- In a limited partnership, at least one of the partners is a "general partner" with unlimited liability, and at least one of the partners is a "limited partner" with what we call "limited liability"—that is, nobody can sue them for things the company does with their money, and so the most they can lose on the venture is the amount they put in. For instance, if John Doe lets Jimmy buy into the shop as a limited partner, and Jimmy pays in $4,000, if the bank sues the shop to collect on a loan, they can only go after the business—Jimmy can't be sued directly. Sure, the business might go under as a result of his suit (meaning he loses his $4,000), but that's besides the point. Jimmy won't lose more than $4,000, end of story. This usually comes with a trade-off, though: limited partners don't have a vote in determining what happens in the business. Also, limited partnerships usually require some kind of paperwork to establish.
A few key points:
- One of the major things that partners control is who becomes a new partner. Usually, it requires at least a majority vote of the existing partners to add a new partner (that is, to allow someone to buy in) to the business. Sometimes it's a super-majority; sometimes it needs to be unanimous.
- Just because you're employed by a partnership doesn't mean that you are a partner. This much should be obvious. In many if not most partnerships, it's a big deal when an employee is "made partner"—that is to say, allowed to buy in.
- Your buy-in need not be with actual money. A lot of the time, someone can become a partner by contributing something else, often equipment. For instance, if Jake and Joe Roe want to open the Roe Brothers Brewery in a small warehouse their dad left them in his will, they don't need to first pool their money and buy the equipment in the name of the brewery—if Jake happens to have some brewing equipment lying around (for whatever reason), he can contribute that instead of money. If the equipment is valued at, say, $10,000, and Joe contributes another $10,000, they'll be 50-50 partners in the firm. It gets weirder, though: if their cousin Dickie Roe comes back home from college with degrees applicable to beer and a good head for new brews, they can let him "buy in" even though he's broke by allowing him to use his future services as science expert/brewmaster as his "contribution."
- Partnerships are often named by listing some or all of the partners. However, the name doesn't necessarily change every time a new partner is added or if a partner leaves, retires, or dies. Some very long-lasting businesses structured as partnerships might have absolutely nobody among the current partners have their name in the name of the firm.
In media
Partnerships are a common form of business for professional organizations; however, as those often have special rules, they will be covered below. Other fictional partnerships include:- Mad Men: Sterling Cooper, and later, Sterling Cooper Draper Pryce (and still later, Sterling Cooper & Partners) are all partnerships. You see a lot of the politicking that goes on in partnerships in the series, especially in the business-heavy episodes.
Corporation
The famous one. These can be big or small. The corporation is a relatively recent development—arising only in about the 17th century or so. The basic point of the corporation is that rather than the firm be some kind of projection of its owners, it is a separate entity. The corporation is centered on the (at least theoretical) division of labor between three groups: shareholders (who own the company), directors (who, um, direct the overall affairs of the company), and officers (who run the business day-to-day). A few key points:- Shareholders, as noted, own the company. Remember, in a corporation, the firm is a separate legal entity from just being a collection of the shareholders. So if John Doe, Jimmy Doe, Jane Roe, and Tammy Smith become shareholders in a newly-established 9th Street Pretzel Corporation, and you, Sammy Troper, are employed at the shop as an assistant baker, then your employment contract is with 9th Street Pretzel Corp., and it means something that it's with 9th Street Pretzel Corp.—this isn't just a d/b/a. If you're getting shortchanged on your paycheck, you have to sue the company; you can't go after John, Jimmy, Jane, or Tammy—they simply own 9th Street Pretzel Corp. Moreover, the equipment you use in making the pretzels belongs to the company, not to any of the shareholders; John can't come in and take the mixer, like he could if it were a sole proprietorship. To get things clear: The shareholders own the company; the company owns the stuff. That's the critical distinction.
- Directors are responsible for the long-term, major stuff in the corporation. What is and is not worth the directors' time is complicated, so we'll just note that (1) there has to be at least one director; (2) there is usually more than one director, and they usually together form a "Board of Directors"; (3) directors may be "inside directors" (that is, employed by or somehow linked to the company) or "outside directors" (um, the opposite of the other thing); and (4) in some countries (e.g. Germany), there may be two boards of directors (this gets complicated and we won't get into the details).
- Officers are employees of the corporation. They usually run the day-to-day operations of the firm, and all manner of other stuff besides. This is where we get all of those three-letter initialisms for corporate officials—CEO, CFO, COO, CTO, etc.—which all stand for "Chief [Something] Officer." As that name implies, there are usually other officers.
All of this gets rather complicated once you realize that the positions of shareholder, director, and officer can be—and often are—combined. In a "closely held" corporation—a common form for small businesses, but also quite a few larger ones—the shareholders, directors, and officers are by and large the same people.
As you might have noticed, ownership in corporation is held by "shareholders", which—as you might guess—means that these people hold "shares." Shares represent an ownership stake in the company—basically, they say "X person owns such and such amount of Y Corp." The interesting thing about shares, though, is that unlike a stake in a partnership or LLC, nothing in the law prevents you from selling your shares to anyone you like. (Note that in closely-held corporations, there is usually a contract or something written in the internal rules of the corporation keeping you from doing that.)
In the US (other countries will vary), corporations are often classed as "C corporations" and "S corporations" based on their tax classification:
- C corporation: The standard variety, which is taxed separately from its owners. Most major companies, and many smaller ones, are treated as such. A corporation is considered to be a C corporation unless it is eligible for, and chooses to, become an...
- S corporation: A closely held corporation may elect to be taxed under Chapter 1, Subchapter S of the Internal Revenue Code (hence the name). While enjoying the legal environment of a C corporation, it pays no income tax. Instead, its profits, losses, tax deductions, and tax credits are passed through to their shareholders, much like a partnership, with the shareholders reporting these on their individual income tax forms. For a company to be eligible for S treatment, all of the following must apply:
- No more than 100 shareholders.note
- All shareholders must be natural persons, with exceptions for certain estates, trusts, and tax-exempt corporations. Partnerships, LLCs, and other types of corporations are ineligible.
- Additionally, all shareholders must be US citizens or permanent residents.
- Finally, only a single class of stock is allowed. For this purpose, "single class" means that each shareholder receives profits and losses in direct proportion to his or her interest in the corporation. Differences in voting rights are disregarded, meaning that an S corporation may have voting and nonvoting stock.
