Business OrganizationsBusiness Organizations There are 3 main forms of business There are 3 main forms of business

organizations:organizations:

Sole Proprietorships—business run by one Sole Proprietorships—business run by one person, Accounts for 6% of all sales in USperson, Accounts for 6% of all sales in US

Partnerships (including Limited Liability Partnerships (including Limited Liability Partnerships)—business jointly owned by 2 or Partnerships)—business jointly owned by 2 or more persons, account for smallest # of salesmore persons, account for smallest # of sales

Corporations—business recognized by law as a Corporations—business recognized by law as a separate legal entityseparate legal entity

Advantages of Sole Advantages of Sole ProprietorshipsProprietorships

Ease of Start-Up: With a small amount of paperwork and legal expenses, just about anyone can start a sole proprietorship.

Relatively Few Regulations: A proprietorship is the least-regulated form of business organization.

Business Itself pays no Income Tax Sole Receiver of Profit: After paying taxes, the owner of

sole proprietorship keeps all the profits. Full Control: Owners of sole proprietorships can run

their businesses as they wish. Easy to Discontinue: Besides paying off legal obligations,

such as taxes and debt, no other legal obligations need to be met to stop doing business. Simply liquidate and enjoy the proceeds.

Disadvantages of Sole Disadvantages of Sole ProprietorshipsProprietorships The biggest disadvantage is unlimited personal liability.

Liability is the legally bound obligation to pay debts. Owner can lose capital AND personal assets (home)

It’s difficult to raise capital (owner may have little)

Sole proprietorships have limited access to resources, Sole proprietorships have limited access to resources,

such as physical capital. Human capital can also be such as physical capital. Human capital can also be

limited, because no one knows limited, because no one knows everythingeverything. Owner may . Owner may

have limited business knowledge/experiencehave limited business knowledge/experience

Sole proprietorships also lack permanence. Whenever Sole proprietorships also lack permanence. Whenever

an owner closes shop due to illness, retirement, or any an owner closes shop due to illness, retirement, or any

other reason, the business ceases to exist.other reason, the business ceases to exist.

Characteristics of ProprietorshipsCharacteristics of Proprietorships

Most sole proprietorships earn modest incomes.Most sole proprietorships earn modest incomes. Many proprietors run their businesses part-time.Many proprietors run their businesses part-time.

Characteristics of Proprietorships

Source: Statistical Abstract of the United States

Under $25,000

$25,000 – $49,999

$50,000 – $99,999

$100,000 – $499,999

$500,000 – $999,999

$1,000,000 or more

By Size of Receipts

0.4%0.9%

70%

12%

8%

9%Mining

Construction

Manufacturing

Transportation

Wholesale trade

Retail trade

Finance, insurance, real estate

By Type

1%3%

13%

Agriculture, forestry, fishing services

Services

3%

5%

16%

8%

2%

49%

Section 1 Review--Section 1 Review--ProprietorshipsProprietorships

1. Any establishment formed to carry on 1. Any establishment formed to carry on commercial enterprises is acommercial enterprises is a– (a) partnership. (a) partnership. – (b) business organization. (b) business organization. – (c) sole proprietorship.(c) sole proprietorship.– (d) corporation. (d) corporation.

2. Sole proprietorships2. Sole proprietorships– (a) are complicated to establish.(a) are complicated to establish.– (b) make up about 6 percent of all businesses.(b) make up about 6 percent of all businesses.– (c) are the most common form of business in (c) are the most common form of business in

the United States.the United States.– (d) offer owners little control over operations.(d) offer owners little control over operations.

Partnerships Fall into 3 Partnerships Fall into 3 Categories:Categories:

General PartnershipGeneral Partnership– In a In a general partnershipgeneral partnership, partners share equally in , partners share equally in

both responsibility and liability.both responsibility and liability. Limited PartnershipLimited Partnership

– In a In a limited partnershiplimited partnership, only one partner is , only one partner is required to be a general partner, or to have required to be a general partner, or to have unlimited personal liability for the firm. unlimited personal liability for the firm.

Limited Liability PartnershipLimited Liability Partnership– A newer type of partnership is the A newer type of partnership is the limited liability limited liability

partnershippartnership. In this form, all partners are limited . In this form, all partners are limited partners.partners.

Advantages of Advantages of PartnershipsPartnerships

1. Ease of Start-Up--1. Ease of Start-Up--Partnerships are easy to establish. Partnerships are easy to establish. There is no required agreement, but it is recommended There is no required agreement, but it is recommended that partners develop that partners develop articles of partnershiparticles of partnership..

2. Shared Decision Making and Specialization--2. Shared Decision Making and Specialization--In a In a successful partnership, each partner brings different successful partnership, each partner brings different strengths and skills to the business.strengths and skills to the business.

3. Larger Pool of Capital--3. Larger Pool of Capital--Each partner's Each partner's assetsassets,, or or money and other valuables, improve the firm's ability to money and other valuables, improve the firm's ability to borrow funds for operations or expansion. Larger size borrow funds for operations or expansion. Larger size aids in streamlining operations, increasing the ability to aids in streamlining operations, increasing the ability to attract skilled employeesattract skilled employees

4. Taxation--4. Taxation--Individual partners are subject to taxes, Individual partners are subject to taxes, but the business itself does not have to pay taxes.but the business itself does not have to pay taxes.

5. Perfect size for some markets (law, doctors, etc.)5. Perfect size for some markets (law, doctors, etc.)

Disadvantages of Disadvantages of PartnershipsPartnerships

Unless the partnership is a limited liability Unless the partnership is a limited liability

partnership, at least one partner has unlimited partnership, at least one partner has unlimited

liability.liability.

General partners are bound by each other’s General partners are bound by each other’s

actions.actions. Partnerships also have the potential for conflict. Partnerships also have the potential for conflict. Partners need to ensure that they agree about Partners need to ensure that they agree about

work habits, goals, management styles, ethics, work habits, goals, management styles, ethics, and general business philosophies.and general business philosophies.

Section 2 Review--Section 2 Review--PartnershipsPartnerships

1. What advantage does a partnership have over a sole proprietorship?1. What advantage does a partnership have over a sole proprietorship?– (a) The responsibility for the business is shared.(a) The responsibility for the business is shared.– (b) The business is easy to start up.(b) The business is easy to start up.– (c) The partners are not responsible for the business debts.(c) The partners are not responsible for the business debts.– (d) The business is easy to sell.(d) The business is easy to sell.

2. How is a general partnership organized?2. How is a general partnership organized?– (a) Every partner shares equally in both responsibility and liability.(a) Every partner shares equally in both responsibility and liability.– (b) The doctors, lawyers, or accountants who form a general (b) The doctors, lawyers, or accountants who form a general

partnership hire others to run the partnership.partnership hire others to run the partnership.– (c) No partner is responsible for the debts of the partnership (c) No partner is responsible for the debts of the partnership

beyond his or her investment.beyond his or her investment.– (d) Only one partner is responsible for the debts of the (d) Only one partner is responsible for the debts of the

partnership.partnership.

CorporationsCorporations Corporations receive a charter from the government Corporations receive a charter from the government

and sell stock. People who buy stock are the owners and sell stock. People who buy stock are the owners of the company and elect officers to run the company. of the company and elect officers to run the company. Accounts for the overwhelming majority of sales.Accounts for the overwhelming majority of sales.

A A corporationcorporation is a legal entity, or being, owned by is a legal entity, or being, owned by individual stockholders.individual stockholders.

StocksStocks, or shares, represent a stockholder’s portion , or shares, represent a stockholder’s portion of ownership of a corporation. of ownership of a corporation. A corporation which issues stock to a limited a number of people is known as a closely held corporation. A publicly held corporation, buys and sells its stock on the open market.

Gov’t corporations DO exist (TVA, Amtrak) and have Gov’t corporations DO exist (TVA, Amtrak) and have boards of directorsboards of directors

Advantages of IncorporationAdvantages of Incorporation

Advantages for the Advantages for the

StockholdersStockholders

• Individual Individual investors do not investors do not carry carry responsibility for responsibility for the corporation’s the corporation’s actions. actions.

• Shares of stock Shares of stock are transferable, are transferable, which means that which means that stockholders can stockholders can sell their stock to sell their stock to others for money.others for money.

Advantages for the Advantages for the CorporationCorporation

• Corporations have Corporations have potential for more growth potential for more growth than other business forms.than other business forms.

• Corporations can borrow Corporations can borrow money buy selling money buy selling bonds.bonds.

• Corporations can hire the Corporations can hire the best available labor to best available labor to create and market the best create and market the best services or goods possible.services or goods possible.

• Corporations have Corporations have unlimited livesunlimited lives

Disadvantages of Disadvantages of IncorporatingIncorporating

Difficulty and Expense of Start-Up--Difficulty and Expense of Start-Up--Corporate Corporate charters can be expensive and time consuming to charters can be expensive and time consuming to establish. A state license, known as a establish. A state license, known as a certificate certificate of incorporationof incorporation,, must be obtained. must be obtained.

Double Taxation--Double Taxation--Corporations must pay taxes on Corporations must pay taxes on their income. Owners of stock also pay taxes ontheir income. Owners of stock also pay taxes on dividendsdividends, or the portion of the corporate profits , or the portion of the corporate profits paid to them.paid to them.

Loss of Control--Loss of Control--Managers and boards of Managers and boards of directors, not owners, manage corporations. directors, not owners, manage corporations.

More Regulation--More Regulation--Corporations face more Corporations face more regulations than other kinds of business regulations than other kinds of business organizations.organizations.

Government Regulation of Government Regulation of CorporationsCorporations

SEC Securities and Exchange Commission—SEC Securities and Exchange Commission—regulates stock trading, insider trading (Martha regulates stock trading, insider trading (Martha Stewart, you’re going down!)Stewart, you’re going down!)

Public utilities have controls put on the rates they Public utilities have controls put on the rates they charge (electricity, gas, etc.). They are legal charge (electricity, gas, etc.). They are legal monopolies because to have too many companies monopolies because to have too many companies putting out so much capital would be wasteful.putting out so much capital would be wasteful.

State and local governments often offer industrial State and local governments often offer industrial development blonds to help industries relocate or development blonds to help industries relocate or tax breaks to draw investmentstax breaks to draw investments

Corporate Corporate Growth/CombinationsGrowth/Combinations

Growth happens in several ways:Growth happens in several ways: Reinvestment: Reinvestment: Companies reinvest profits to expand Companies reinvest profits to expand

production, purchase more efficient capital goods production, purchase more efficient capital goods (machinery), renovate factories, pursue better (machinery), renovate factories, pursue better laborers. Businesses estimate cash flow, subtract laborers. Businesses estimate cash flow, subtract expenses, taxes, and depreciation to determine expenses, taxes, and depreciation to determine profit. Then you decide whether part of the cash flow profit. Then you decide whether part of the cash flow should be reinvested to generate additional sales should be reinvested to generate additional sales and profits.and profits.

Mergers:Mergers: Companies combine operations, elect 1 Companies combine operations, elect 1 board of directors. (AOL-Time Warner)board of directors. (AOL-Time Warner)

A A conglomerateconglomerate is a business combination merging is a business combination merging more than three businesses that make unrelated more than three businesses that make unrelated products. (GE owns NBC and various other units)products. (GE owns NBC and various other units)

Corporate MergersCorporate Mergers Merged companies give up their separate Merged companies give up their separate

identitiesidentities Mergers happen because companies ant to grow Mergers happen because companies ant to grow

faster, become more efficient, diversify operations, faster, become more efficient, diversify operations, acquire or deliver a better product (Daimler-Benz acquire or deliver a better product (Daimler-Benz wanted Chrysler minivans and Jeeps). Mergers are wanted Chrysler minivans and Jeeps). Mergers are also creative ways of eliminating rivals and also creative ways of eliminating rivals and changing the image of a company. Daimler-Benz changing the image of a company. Daimler-Benz essentially “took over” Chrysler.essentially “took over” Chrysler.

Some companies are just a “good buy”Some companies are just a “good buy” Usually must be approved by both U.S. and Usually must be approved by both U.S. and

European regulators (it’s not that the countries European regulators (it’s not that the countries lack sovereignty, but the business won’t be able to lack sovereignty, but the business won’t be able to do business in some countries if it isn’t approved)do business in some countries if it isn’t approved)

Types of MergersTypes of Mergers

Horizontal mergersHorizontal mergers combine two or combine two or more firms competing in the same more firms competing in the same market with the same good or service. market with the same good or service. (Burger King/McDonald’s merger)(Burger King/McDonald’s merger)

Vertical mergersVertical mergers combine two or more combine two or more firms involved in different stages of firms involved in different stages of producing the same good or service. producing the same good or service. (General Motors and a bank merge)(General Motors and a bank merge)

Multinational CorporationsMultinational CorporationsMultinational corporations (MNCs) are large

corporations headquartered in one country that have subsidiaries throughout the world.

Advantages of MNCs--Multinationals benefit consumers by offering products worldwide. They also spread new technologies and production methods across the globe.

Disadvantages of MNCs--Some people feel that MNCs unduly influence culture and politics where they operate. Critics are concerned about wages and working conditions provided by MNCs. This is a wrong impression--65 % of U.S. based MNCs overseas employment is in high wage countries, mostly in Europe

Section ReviewSection Review1. All of the following are advantages of incorporation EXCEPT1. All of the following are advantages of incorporation EXCEPT

– (a) The responsibility for the business is shared.(a) The responsibility for the business is shared.– (b) Capital is easier to raise than in other business forms.(b) Capital is easier to raise than in other business forms.– (c) Corporations face double taxation.(c) Corporations face double taxation.– (d) Corporations have more potential for growth.(d) Corporations have more potential for growth.

2. A horizontal merger2. A horizontal merger– (a) combines two or more firms involved in different stages of (a) combines two or more firms involved in different stages of

producing the same good or service.producing the same good or service.– (b) combines two or more partnerships into a larger (b) combines two or more partnerships into a larger

partnership. partnership. – (c) combines two or more firms competing in the same market (c) combines two or more firms competing in the same market

with the same good or service.with the same good or service.– (d) combines more than three businesses producing unrelated (d) combines more than three businesses producing unrelated

goods. goods.

FranchisesFranchises

A business franchise is a semi-independent business that pays fees to a parent company in return for the exclusive right to sell a certain product or service in a given area.

Franchisers develop products and business Franchisers develop products and business systems, then local franchise owners help systems, then local franchise owners help to produce and sell those productsto produce and sell those products

Franchises allow owners a degree of Franchises allow owners a degree of control, as well as support from the parent control, as well as support from the parent companycompany

Advantages and Disadvantages of Advantages and Disadvantages of Business FranchisesBusiness Franchises

Advantages of Advantages of Business FranchisesBusiness Franchises

Management training Management training and supportand support

Standardized qualityStandardized quality National advertising National advertising

programs Financial programs Financial assistanceassistance

Centralized buying Centralized buying powerpower

Disadvantages of Disadvantages of Business Business

FranchisesFranchises

High franchising High franchising fees and royaltiesfees and royalties

Strict operating Strict operating standardsstandards

Purchasing Purchasing restrictionsrestrictions

Limited product lineLimited product line

CooperativesCooperativesA cooperative is a business organization owned and

operated by a group of individuals for their shared benefit

Consumer CooperativesConsumer Cooperatives

•Retail outlets owned and operated by consumers Retail outlets owned and operated by consumers are called are called consumer cooperatives,consumer cooperatives, or purchasing or purchasing cooperatives. Consumer cooperatives sell their cooperatives. Consumer cooperatives sell their goods to their members at reduced prices. They goods to their members at reduced prices. They often buy goods in bulk, for example.often buy goods in bulk, for example.

Service CooperativesService Cooperatives

•Cooperatives that provide a service, rather than Cooperatives that provide a service, rather than goods are goods are service cooperatives. service cooperatives. (Credit Unions)(Credit Unions)

Producer CooperativesProducer Cooperatives

•Producer cooperativesProducer cooperatives are agricultural marketing are agricultural marketing cooperatives that help members sell their cooperatives that help members sell their products. products.

Nonprofit OrganizationsNonprofit OrganizationsInstitutions that function like business organizations, but

do not operate for profits are nonprofit organizations. They are exempt from federal income taxes.

Professional Organizations--work to improve the image, working conditions, and skill levels of people in particular occupations. EX: AMA, ABA

Business Associations--promote the business interests of a city, state, or other geographical area, or of a group of similar businesses.

Trade Associations--promote the interests of particular industries are called trade associations.

Labor Unions-- labor union is an organized group of workers whose aim is to improve working conditions, hours, wages, and fringe benefits. EX: Teacher’s Unions, United Auto Workers. Main tool—collective bargaining

Section ReviewSection Review1. A business franchise1. A business franchise

– (a) attempts to improve the image and working (a) attempts to improve the image and working conditions of people in a particular occupation.conditions of people in a particular occupation.

– (b) operates without the aim of profit.(b) operates without the aim of profit.– (c) is a semi-independent business tied to a parent (c) is a semi-independent business tied to a parent

company.company.– (d) is not required to pay income taxes.(d) is not required to pay income taxes.

2. Consumer cooperatives2. Consumer cooperatives– (a) are owned and operated by consumers.(a) are owned and operated by consumers.– (b) provide a service, rather than a good.(b) provide a service, rather than a good.– (c) help members sell their agricultural products.(c) help members sell their agricultural products.– (d) pay no income tax.(d) pay no income tax.