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Business Organizations

Chapter 3

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Sole Proprietorships Most common form of business

organization in the U.S.

Owned & run by one individual

Smallest form of business

Smallest fraction of total sales

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Forming a proprietorship Easiest form of business to start

Only requirements…business license & fees

Advantages Own boss, keep profits, do not have to pay

separate taxes

Disadvantages Unlimited liability, hard to raise money, size &

efficiency, limited managerial experience, hard to find good employees, & limited life

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Partnerships Business that is jointly owned by two or more people. Least

common type of business organization

Types of partnerships

General partnership

Most common form All partners are responsible for management & financial obligations of

business

Limited partnership

At least one partner is not active in the daily running of the business. The limited partner has limited responsibility for debts & obligations

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Forming a partnership Easy to start up

Articles of partnership

Specifies arrangements between partners

I.e. How are profits divided up? How are tasks assigned?

Advantages Ease of start-up, minimal costs, focus on strengths

Disadvantages Conflict, limited life

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Corporations

Form of business organization recognized by law as a separate legal entity

Has all of the rights of an individual

Corporation has the right to buy and sell property, to enter into legal contracts, and to sue and be sued

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Forming a corporation Must file for permission from national

government or state where business will have its headquarters

Charter

Government document that gives permission to create a corporation

States company’s name, address, purpose, and other features of the business

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Stock Certificate of ownership in a

corporation

Shares of stock are sold to stockholders or shareholders

They become part-owners in company

Dividends – portion of corporations profits are paid to stockholders

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Corporate Structure

Common stock

Most frequently used form of corporate ownership, with one vote per share for stockholders

Votes are used to elect a board of directors, which in turn directs the corporation’s business by setting policies & goals

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Preferred stock Form of corporate ownership without vote

Stockholders get their investments back before common stockholders

Corporation Adv – ease of raising money, limited liability,

unlimited life Disadv – double taxation, expensive to set up,

less control, more govt regs

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Business Growth & Expansion

Section 2

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Merger

Combination of two or more businesses to form a single firm

Can be risky

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Income statement

Report showing a firm’s sales, expenses, net income, and cash flows for a certain period

Shows how a business uses some of its revenue to reinvest in the company

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Net income Common measure of business profits

determined by subtracting all expenses, including taxes, from revenues

Depreciation- a noncash charge the firm takes for general wear & tear on its capital goods

Cash flow- total amount of new funds a business generates from operations

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Growth through mergers Types of mergers

Horizontal – same product

Vertical – different stages of production

Conglomerates – unrelated products

Reasons for merging Grow faster, efficiency, better product, eliminate

rival, change image

Multi-nationals - A corporation that has operations in a # of different countries

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Nonprofit Organizations

Section 3

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Nonprofit Organization

Economic organization that operates like a business but does not seek financial gain

I.E. American Red Cross

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Cooperatives

Nonprofit association performing some kind of economic activity for the benefit of its members

Types of cooperatives

Consumer Service Producer

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Labor Unions An organization of workers formed to

represent its members’ interests concerning pay, working conditions, and benefits

Collective Bargaining Negotiations with management over issues such

as pay, hours, insurance, and other job related matters

Unions also lobby for laws that will benefit & protect their workers

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Professional Association

Nonprofit organization of professional or specialized workers seeking to improve working conditions, skill levels, & public perception of its profession.

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Chamber of commerce

Nonprofit organization of local businesses formed to promote their interests.

Sponsors activities ranging from educational programs to lobbying for favorable business legislation

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Better Business Bureau

Business-sponsored nonprofit organization providing information on local companies to consumers

Also maintain records of consumer inquiries & complaints

Offer consumer education programs

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Government Direct Role

Many government agencies produce & distribute goods/services to consumers. I.E. USPS, FDIC

Indirect Role

Acts as an “umpire” to help the market economy operate smoothly & efficiently.

I.E. regulation of public utilities