AP® Business with Personal Finance review sheet from Aim for Five (aimforfive.com/business-finance/units/1/1-7)
Unit 1 · Topic 1.7
1.7 Organization, Roles, and Responsibilities
How a business is legally organized decides who controls it, who keeps the profits, who is on the hook for its debts and how easily it can raise money. As a business grows, it also splits its work into specialized departments and may hand some tasks to other companies.
Key terms
- sole proprietorship
- partnership
- limited liability company (LLC)
- corporation
- personal liability
- outsourcing
The four main types of business
Personal liability means the owner's own money and belongings (savings, car, house) can be taken to pay the business's debts if the business can't pay.
| Type | Who controls it | Who is liable for debts | Access to money and growth |
|---|---|---|---|
| Sole proprietorship (one owner) | The owner, who keeps all profits | The owner, personally | Limited |
| Partnership (two or more owners) | The partners, who share profits | The partners, personally | Limited |
| Limited liability company (LLC) | The owners | The business, not the owners personally | Limited |
| Corporation | Shareholders and an elected board of directors | The company itself | Usually the most |
The big trade-off: control vs. growth
Sole proprietorships, partnerships and LLCs let owners keep control of decisions and profits. The catch is that they usually have a harder time getting large amounts of funding, which can limit growth.
A sole proprietor or partner who wants to protect their personal belongings from business debts can organize as an LLC instead.
When a business becomes a corporation, owners give up control to shareholders (people who own shares of stock) and a board of directors that shareholders elect. In exchange, corporations can usually raise much more money, for example by selling stock, and can grow larger. The company, not the individual owners, controls its profits and is responsible for its debts.
Who does what in small and large businesses
A sole proprietor is responsible for everything and wears many hats: chief executive officer (CEO), marketer, product developer, money manager and operations manager. Partners also share responsibility for everything, usually splitting roles by each partner's strengths and interests.
As a business grows, one person can't handle it all, so it hires people with specific skills and groups them into specialized departments. Executives such as the CEO set the overall vision, strategy and operations and are responsible for the business's performance. Department managers lead each team and report to the executives. In a corporation, the executives report to the board of directors and shareholders.
Specialized departments
Specialists build deep expertise, so the business serves customers better and more efficiently. A business may also outsource, hiring another company to handle a function, when that's cheaper or more efficient. A startup with no tax expert might outsource its taxes to an accounting firm; a company with high labor costs might outsource customer support.
- Sales and marketing: research the market, plan how to sell, manage brands and build customer relationships.
- Research and development (R&D): invent and improve products and processes.
- Operations: make the goods or deliver the services and get them to customers.
- Accounting: track spending and earnings and prepare financial statements.
- Finance: raise and manage money and use financial data to suggest improvements.
- Human resources (HR): hire, train and evaluate employees.
Worked examples
Try each one yourself first, then open the solution.
- Example 1
Liability when a business fails
Jordan and Priya run a café. It closes owing a supplier $40,000, and the business has only $10,000 left. What happens to the remaining $30,000 if (a) they're a general partnership, or (b) they formed an LLC?
Show the solutionHide the solution
- Step 1: Remaining debt = $40,000 − $10,000 = $30,000.
- Step 2: (a) Partners are personally liable for all business debts. The supplier can go after Jordan's and Priya's personal savings and property for the $30,000.
- Step 3: (b) An LLC protects owners from personal liability for business debts, so the supplier generally can collect only from the business's own assets. One caution: owners who personally sign a guarantee for a loan can still owe on that loan.
Answer: (a) Jordan and Priya are personally on the hook for the $30,000. (b) As LLC owners, their personal belongings are generally protected; the supplier is limited to the business's assets.
Common mistakes
- Thinking LLC owners give up control like corporate owners do. LLC owners keep control; they just gain protection from personal liability.
- Saying a corporation's owners are personally liable for its debts. The company is.
- Mixing up accounting (recording and reporting the numbers) with finance (raising and managing money and using the numbers to plan).
On the exam
- Many questions give a business owner's goals (keep control, protect personal savings, raise lots of money to grow) and ask which business type fits best.
- Be ready to match a task to the department that handles it, or to explain why a business outsources a function.
Connected topics
Videos
Check yourself: 1.7 Organization, Roles, and Responsibilities
4 questions on 1.7 Organization, Roles, and Responsibilities. Pick an answer to see if you got it, and why.
Three people are deciding how to organize their businesses.
Marcus will run a mobile bike-repair service by himself. He wants full control and all the profits, and he accepts being personally responsible for the business's debts.
Lena and Jo will open a bakery together. Lena will handle baking and recipes, and Jo will handle the books and marketing. They want to keep control of the bakery but don't want to risk their homes and savings if it fails.
Sam's software company has grown quickly and needs $20 million to expand overseas. Sam is willing to give up some decision making to raise that much money.
Hypothetical scenarios
Marcus's business will most likely be organized as a
Which form of business organization best fits Lena and Jo's goals?
If Sam's company becomes a corporation and sells shares of stock, which of the following is most likely to happen?
As the bakery grows, Lena and Jo pay an outside accounting firm to run payroll instead of doing it themselves. This is an example of
0 of 4 answered