CHAPTER 3

Business Organizations

Section 1

Forms of Business Organizations

Sole Proprietorships

The most common form of business in the United States is a sole proprietorship

Defined as a business run or owned by 1 person

They are also the smallest in size (number of employees and revenue)

They earn about 1/6 of the net income earned by all businesses

Sole Proprietorship

ADVANTAGES DISADVANTAGES

Ease of startup Ease of management Owner enjoys the profits

of successful management

The owner does not have to pay separate business income taxes

Psychological satisfaction Ease of getting out of

business

The owner has unlimited liability

Difficulty in raising financial capital

Size and efficiency The proprietor often has

limited managerial experience

Difficulty in attracting quality employees

The sole proprietorship is limited life

Partnership

Partnership is another type of business It is a business that is jointly owned by 2

or more people There are 2 types of partnerships

General- all partners are responsible for the management and financial obligations of the business

Limited- at least 1 partner is not active in the daily running of the business, although he or she may have contributed funds to finance the operation

Partnership

ADVANTAGES DISADVANTAGES

Ease of establishment Ease of management Lack of special taxes They usually attract

financial capital more easily than proprietorships

Slightly larger in size, making for more efficient operation

They find it easier to attract top talent into their organizations

Each partner is fully responsible for the actions of the other partners

Limited life Potential conflict

between partners

Corporations

It is a form of business organization recognized by law as a separate legal entity, having all the rights as an individual

They account for 1/5 of the firms in the United States but 90% of all the sales

It is a very formal procedure to form and it must receive permission from the United States in order to be formed

The government gives it a charter (a document that gives permission to form a corporation)

The charter specifies the amount of stock a corporation may have

Stockholders, or share holders, then buy stock in the corporation and becomes an owner with certain owner rights

Corporations

There are 2 basic kinds of stock purchased in a corporation Common Stock- represents basic ownership

and the owner generally receives 1 vote for each share of stock they own in order to elect a board of directors; can receive dividends

Preferred Stock- represents non-voting ownership shares of the corporation; has priority over common stockholders for dividends

Corporations

ADVANTAGES DISADVANTAGES

The ease of raising financial capital

The directors can hire professional managers to run the firm

The corporation provides limited liability for its owners

Unlimited life The ease of transferring

ownership

The difficulty and expense of getting a charter

The owners and shareholders have little say in how the business is run after they have voted in a board of directors

Double taxation They are subject to more

government regulation

Government and Business Regulation

Government can regulate corporations in order to protect the consumers’ interests

States have limited regulations lately in order to encourage competition

States actively recruit corporations to come to their state

They can offer tax credits, or a reduction in taxes, in return for the creation of new jobs or new business investment

Section 2

Business Growthand Expansion

Growth Through Reinvestment

A business must estimate its cash flow first by finding its net income (subtracting all of its expenses, including taxes, from its revenues)

These expenses include any and all costs, as well as depreciation (how much value an item loses through general wear and tear)

Cash flow = sum of net income and depreciation (non-cash charges)

Companies must then reinvest its cash flow in order to be able to produce more products

Growth Through Mergers

When firms merge (join together), 1 of the firms gives up its corporate identity

Mergers happen for multiple reasons. For example: Managers feel they cannot grow as fast they

would using the funds they are currently generating internally

Efficiency The need to acquire new product lines To catch up with, or even eliminate, their rivals To lose its corporate identity

Mergers / Conglomerates / Multinationals

There are generally 2 types of mergers: Horizontal merger- when 2 or more firms that produce

the same kind of product join forces Vertical merger- When firms involved in different steps of

marketing or manufacturing merge A conglomerate is when a corporation becomes so

large through mergers and acquisitions Diversification is the main reason for conglomerates Other large corporations are also known as

multinationals basically meaning they manufacture or service operations in a number of different countries

Multinationals are important because they can sell goods and produce goods in many different places

Section 3

Other Organizations

Non-Profit Organizations

Community and Civic Organizations are non-profit organizations (schools, churches, hospitals, welfare groups, and adoption services)

They provide goods and services to the public while pursuing other rewards which are not cash driven

They do not issue stock, pay dividends, or pay income taxes

Cooperatives

Cooperatives (or Co-ops) are non-profit organizations that carry out economic activity that will benefit its members

Some types of Cooperatives are as follows: Consumer Cooperatives- Voluntary

associations that buy bulk amounts of goods such as food and clothing on behalf of its members

Service Cooperatives- Provides services such as insurance, credit, and baby-sitting to its members

Producer Cooperatives- Helps members promote or sell their products.

Labor, Professional, and Business Organizations

Labor Unions are organizations workers form to represent its members’ interests in various employment matters

They generally participate in collective bargaining by negotiating with management over various issues for its members

Professional associations are a group of people in a specialized occupation that work to improve working conditions

Business associations are groups used to promote the interest of businesses, for example, the Chamber of Commerce or Better Business Bureau

Government

Government is a non-profit economic organization

TVA Power Company, is an example of a Government company that provides a direct service to the people, competing with private power companies

FDIC (Federal Deposit Insurance Company) is another example by insuring deposits in banks

U.S. Post Office is another example

Government

Government also acts indirectly by way of making sure the market economy operates smoothly

Public utilities are regulated by the government in order to deliver important products to the public at affordable prices for consumers

It also plays an indirect role when it grants money to people in the form of Social Security, veterans benefits, financial aid to college, and unemployment

This power is used to influence the production of goods and services