© SWS 2009 1 CHAPTER 8 TYPES OF BUSINESS STRUCTURES

© SWS 2009 1

CHAPTER 8CHAPTER 8 TYPES OF BUSINESS TYPES OF BUSINESS

STRUCTURESSTRUCTURES

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Starting a business requires more than Starting a business requires more than natural resources, labor, and capital. natural resources, labor, and capital.

An An entrepreneurentrepreneur is an individual who is an individual who is willing to organize and manage a is willing to organize and manage a business in order to make a profit.business in order to make a profit. The The entrepreneurentrepreneur answers the basic answers the basic

economic questions about economic questions about what, how, and what, how, and for whomfor whom a good or service will be a good or service will be produced.produced.

He/she assumes He/she assumes ALLALL the the RISKRISK..

How to start an Economic Institution?How to start an Economic Institution?

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Many of the nation’s Many of the nation’s entrepreneursentrepreneurs became famous for their ability to became famous for their ability to organize and manage.organize and manage. Andrew Carnegie in steel, Andrew Carnegie in steel, John D. Rockefeller in oil, John D. Rockefeller in oil, Henry Ford in automobiles, Henry Ford in automobiles, Bill Gates in computers, Bill Gates in computers, Ray Kroc (McDonald’s) in fast foods, Ray Kroc (McDonald’s) in fast foods, and Sean Combs or Tim McGrawand Sean Combs or Tim McGraw in music.in music.

Examples of entrepreneurs?Examples of entrepreneurs?

Entrepreneurs often are successful Entrepreneurs often are successful because they see opportunities where because they see opportunities where others do not. others do not. People thinking of starting a business People thinking of starting a business should watch for opportunities and should watch for opportunities and acquire the training that will increase acquire the training that will increase their chances of success.their chances of success.

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Entrepreneurs must make many decisions as Entrepreneurs must make many decisions as they start up new businesses. they start up new businesses.

One of the first decisions they face is One of the first decisions they face is what what form of business organization best serves form of business organization best serves their intereststheir interests. .

A A business organizationbusiness organization is an establishment is an establishment formed to carry on commerce. formed to carry on commerce.

In other words, a In other words, a business organizationbusiness organization is a is a company and these business organizations can be set-company and these business organizations can be set-up as a:up as a:

(1) (1) corporationcorporation ((privateprivate or or publicpublic))

(2) (2) partnershippartnership, or, or

(3) (3) sole proprietorshipsole proprietorship

WHAT STRATEGIES DO WHAT STRATEGIES DO ENTREPRENEURS USEENTREPRENEURS USE??

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CorporationsCorporations Large and ComplexLarge and Complex

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CorporationsCorporations defined:defined:

CORPORATIONSCORPORATIONS

The most The most complexcomplex type of business type of business organization is the corporation.organization is the corporation.

It is a It is a legal entitylegal entity or being, owned or being, owned by individual stockholders, each of by individual stockholders, each of whom faces whom faces limited liabilitylimited liability for the for the firm’s debts.firm’s debts.

Stockholders own Stockholders own stockstock or or sharesshares, , which represent their portion of which represent their portion of ownership in the corporation. ownership in the corporation. 6

Corporation’sCorporation’s Structure:Structure:


A corporation has the following general structure:A corporation has the following general structure:

Board of DirectorsBoard of Directors

(some of the board members ARE stockholder and some ARE NOT)

Stockholders

(owners of stock)

CEO

Regional Sales

Managers

Regional IT Managers

Customer Support Regional Managers

Regional Warehouse Managers

COOCFOCIO CMO

Customer Support

Managers

Warehouse Managers

Store Managers

Sales Managers

Controller of Accounting

Store EmployeesSalesmen

Customer Service Representatives

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CorporationsCorporations raise money through raise money through the sale of the sale of stocks stocks and/or and/or bondsbonds::


BondsBonds:: LESS RISKLESS RISK A A bondbond promises to pay a stated rate of promises to pay a stated rate of

interest over a stated period of time; it interest over a stated period of time; it also promises to repay the full amount also promises to repay the full amount borrowed at the end of that time borrowed at the end of that time (called (called a maturity datea maturity date))

Stock:Stock: MORE RISKMORE RISK because your money is lost because your money is lost

if the company goes bankrupt.if the company goes bankrupt. It is more of a gamble.It is more of a gamble.

STOCK MARKETPLACESTOCK MARKETPLACEStock is registered with the Stock is registered with the Securities and Securities and Exchange CommissionExchange Commission (SEC: the protector of (SEC: the protector of investors)investors) The largest corporations are usually listed on The largest corporations are usually listed on the the New York Stock Exchange (NYSE).New York Stock Exchange (NYSE).Some stocks for smaller companies many be Some stocks for smaller companies many be listed listed National Association of Securities National Association of Securities Dealers Automated QuotationDealers Automated Quotation ((NASDAQNASDAQ) ,) , AMEX AMEX (New York)., (New York)., or or OTCBBOTCBB (part of NASD).(part of NASD).A corporation can raise capital to A corporation can raise capital to develop/expand by also develop/expand by also selling debtselling debt by issuing by issuing bondsbonds. .

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How do Corpporations get money for the business? They…buy and sell stock!


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Other World Exchange Other World Exchange MarketsMarkets


StocksStocks are bought and sold at financial markets are bought and sold at financial markets called called stock exchangesstock exchanges, such as the…, such as the…

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Three Types of Three Types of Corporations:Corporations:

CorporatioCorporatio

ns:ns:


1.) 1.) Private CorporationsPrivate Corporations:: Some Some corporations issue stock to only corporations issue stock to only employees or family members. employees or family members. These stockholders cannot trade These stockholders cannot trade (or sell) (or sell) their stock. their stock.

2.) 2.) Publicly-traded CorporationsPublicly-traded Corporations:: It It has many shareholders who can has many shareholders who can buy or sell stock on the open buy or sell stock on the open market. market.

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Three Types of Three Types of Corporations:Corporations:


3.) 3.) “S”- Corporations“S”- Corporations: : A small corporation A small corporation that is taxed like a partnership, but has that is taxed like a partnership, but has individual stockholders.individual stockholders. Corporation pays Corporation pays NO federal tax on its NO federal tax on its

profitsprofits, instead the individual share owners , instead the individual share owners do. do. Each shareholder is responsible for Each shareholder is responsible for paying their share of the taxes (like a LLC).paying their share of the taxes (like a LLC).

Advantage:Advantage: if the business loses money, the if the business loses money, the individual shareholders can write down their individual shareholders can write down their personal income, resulting in less personal personal income, resulting in less personal taxes paid.taxes paid.

Advantage:Advantage: shareholders and employees of shareholders and employees of an S - corporation do not pay Medicare or an S - corporation do not pay Medicare or Social Security taxes (FICA). Social Security taxes (FICA).

Requirements:Requirements: Corporation can’t have more Corporation can’t have more than 75 shareholders.than 75 shareholders.

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1.)1.) Very Little Liability:Very Little Liability: A corporation is defined as A corporation is defined as an an ""entityentity"" because it has a legal identity separate because it has a legal identity separate from those of its owners. A corporation pays taxes, from those of its owners. A corporation pays taxes, engages in business, makes contracts, sues other engages in business, makes contracts, sues other parties, and gets sued by others.parties, and gets sued by others.

2.)2.) Access to Many Resources:Access to Many Resources: corporations have corporations have more access to more access to physical capitalphysical capital and they have and they have access to access to human capitalhuman capital. . (well educated business (well educated business leaders)leaders)

3.) 3.) Indefinite Life Indefinite Life (immortal)(immortal):: a corporation will not a corporation will not cease to exist if the owner passes, or retires.cease to exist if the owner passes, or retires.

4.)4.) Easy to Raise Money:Easy to Raise Money: through the sales of stock, through the sales of stock, a company can raise money to fund operations.a company can raise money to fund operations.

Advantages of Corporations:Advantages of Corporations:


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1.)1.) Owner has Little Control:Owner has Little Control: he/she has he/she has little control over the company. They little control over the company. They have to listen to the Board of Directors have to listen to the Board of Directors and the stockholders.and the stockholders.

2.)2.) Does NOT React quickly to changes in Does NOT React quickly to changes in the market:the market: corporations are huge corporations are huge bureaucraciesbureaucracies and they are not quick to and they are not quick to response to the marketplaces.response to the marketplaces. Everything has to be approved by the Board Everything has to be approved by the Board

of Directors of Directors (which takes valuable time)(which takes valuable time)

DisadvantagesDisadvantages of Corporations: of Corporations:


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PartnershipsPartnerships Two or more owners who Two or more owners who split responsibility of the split responsibility of the

management of the management of the companycompany

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1.)1.) Shared Decision Making and Shared Decision Making and Specialization:Specialization: divide up the work and divide up the work and the costs of the company.the costs of the company. Able to tap into Able to tap into HUMAN CAPITALHUMAN CAPITAL resources.resources.

2.) 2.) Combining of Capital:Combining of Capital: combine the combine the money and human resources money and human resources (intelligence)(intelligence) of two in order to get started.of two in order to get started.

3.)3.) Not Liable for other partners actions:Not Liable for other partners actions: if if one partner screws up, then the other is one partner screws up, then the other is not liable for the wrong-doing. not liable for the wrong-doing. ((DOES NOT DOES NOT APPLY FOR GENERAL PARTNERSHIPAPPLY FOR GENERAL PARTNERSHIP))

AdvantagesAdvantages of Partnerships: of Partnerships:

PARTNERSHIPSPARTNERSHIPS

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1.) 1.) Limited Liability:Limited Liability: each partner could each partner could lose what they put into the partnership lose what they put into the partnership due to another partner’s actions…due to another partner’s actions… ……so choose your business partners so choose your business partners

carefully!carefully!2.)2.) Loss of Individual Control:Loss of Individual Control: you must you must

share the decision-making share the decision-making ((even in a LP, even in a LP, because the others are giving you money, because the others are giving you money, you have to listen to their needsyou have to listen to their needs))

3.)3.) Disagreements:Disagreements: if a conflict starts, if a conflict starts, then the business could suffer because then the business could suffer because of the disagreementof the disagreement

DisadvantagesDisadvantages of of Partnerships:Partnerships:

PARTNERSHIPSPARTNERSHIPS

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Sole ProprietorshipsSole ProprietorshipsThe smallest of them all, The smallest of them all,

but the most versatile and but the most versatile and easiest to start.easiest to start.

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Sole ProprietorshipsSole Proprietorships The Role of Sole Proprietorships:The Role of Sole Proprietorships:

THE TYPES OF BUSINESSES THE TYPES OF BUSINESSES ORGANIZATIONSORGANIZATIONS

A A sole proprietorshipsole proprietorship is a business is a business owned and managed by a owned and managed by a singlesingle individual. individual.

That person earns That person earns allall of the firm's of the firm's profits and is responsible for profits and is responsible for allall of of the firm's debts. the firm's debts.

This type of firm is by far the most This type of firm is by far the most popular in the United States. popular in the United States. According to the Internal Revenue According to the Internal Revenue Service, aboutService, about 75 PERCENT75 PERCENT of all US of all US businesses are sole proprietorships.businesses are sole proprietorships.

Most sole proprietorships are Most sole proprietorships are smallsmall.. Why?Why?

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Sole ProprietorshipsSole Proprietorships AdvantagesAdvantages of Sole Proprietorships: of Sole Proprietorships:

1.)1.) Easy to Start:Easy to Start: While you need to do more While you need to do more than just hang out a sign to start your own than just hang out a sign to start your own business, a sole proprietorship is simple to business, a sole proprietorship is simple to establish. establish.

With just a small amount of paperwork and With just a small amount of paperwork and legal expense, just about legal expense, just about anyoneanyone can start a can start a sole proprietorship.sole proprietorship.

To start a new business, a sole proprietor To start a new business, a sole proprietor must meet a small number of government must meet a small number of government requirements, which can vary from city to city requirements, which can vary from city to city and state to state.and state to state.1.1. Name:Name: may use his/her own name as the name may use his/her own name as the name

of the business; a sole proprietor must register of the business; a sole proprietor must register some business name.some business name.

2.2. AuthorizationAuthorization:: sole proprietors must obtain a sole proprietors must obtain a business licensebusiness license..

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Cherokee County Business License

Database

INFORMATION INFORMATION NEEDED:NEEDED:

1.1.Contact InfoContact Info

2.2.Number of Number of employeesemployees

3.3.Type of business Type of business with a description of with a description of services providedservices provided

4.4.Agreement by the Agreement by the owner to follow the owner to follow the rules and codes.rules and codes.

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Sole ProprietorshipsSole Proprietorships AdvantagesAdvantages of Sole Proprietorships: of Sole Proprietorships: 2.)2.) Few Regulations:Few Regulations: A proprietorship is the A proprietorship is the

least-regulatedleast-regulated form of business organization. form of business organization. Most importantly, because they require little Most importantly, because they require little

legal paperwork, sole proprietorships are legal paperwork, sole proprietorships are usually usually the least expensive form of ownership the least expensive form of ownership to establish.to establish.

Does this mean they have NO Does this mean they have NO regulations?regulations?

Even the smallest business, however, is Even the smallest business, however, is subject to some regulation, especially subject to some regulation, especially industry-specific regulations.industry-specific regulations.

For example, a gourmet soft pretzel stand For example, a gourmet soft pretzel stand would be subject to health codes, and a would be subject to health codes, and a painting business would be subject to codes painting business would be subject to codes regarding dangerous chemicals.regarding dangerous chemicals.

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THE TYPES OF BUSINESS THE TYPES OF BUSINESS ORGANIZATIONSORGANIZATIONS

Sole ProprietorshipsSole Proprietorships AdvantagesAdvantages of Sole Proprietorships: of Sole Proprietorships: 3.)3.) Owner makes all profit:Owner makes all profit: If the business If the business

succeeds, the owner does not have to share succeeds, the owner does not have to share the success with anyone else.the success with anyone else.

4.)4.) Total control of decisions:Total control of decisions: sole sole proprietors can run their businesses as they proprietors can run their businesses as they wish. wish.

This means that they can respond This means that they can respond quickly to changes in the marketplace.quickly to changes in the marketplace.

5.)5.) Easy to Discontinue:Easy to Discontinue: Finally, if sole Finally, if sole proprietors decide to stop operations and do proprietors decide to stop operations and do something else for a living, they can do so something else for a living, they can do so easily. easily.

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Sole ProprietorshipsSole Proprietorships DisadvantagesDisadvantages of Sole Proprietorships: of Sole Proprietorships:

TYPES OF BUSINESSESTYPES OF BUSINESSES

1.)1.) Unlimited Personal Liability:Unlimited Personal Liability: sole sole proprietors are fully and personally proprietors are fully and personally responsible for all their business debts & responsible for all their business debts & taxes on profits.taxes on profits.

2.)2.) Limited Access To Resources:Limited Access To Resources: Many Many small business owners use all of their small business owners use all of their available savings and other personal available savings and other personal resources to start up their businesses. This resources to start up their businesses. This makes it difficult or impossible for them to makes it difficult or impossible for them to expand quickly.expand quickly.

Also, they may lack Also, they may lack HUMAN CAPITALHUMAN CAPITAL, which would , which would make their business suffer.make their business suffer.

3.)3.) When owner dies, the business dies:When owner dies, the business dies: when owner dies or retires the company when owner dies or retires the company ceases to exist.ceases to exist.

4.)4.) No Fringe Benefits:No Fringe Benefits: No healthcare plan, No healthcare plan, dental coverage, 401k retirement plan, or dental coverage, 401k retirement plan, or paid vacationspaid vacations

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END CHAPTER 8END CHAPTER 8

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© SWS 2009 1 CHAPTER 8 TYPES OF BUSINESS STRUCTURES