Business OrganizationsBusiness Organizations

Businesses may be organized in a Businesses may be organized in a variety of waysvariety of ways

1) Sole Proprietorship1) Sole Proprietorship

2) Partnership2) Partnership

3) Corporation3) Corporation

Each type of organization offers Each type of organization offers significant advantages and significant advantages and

disadvantagesdisadvantages

Sole ProprietorshipsSole Proprietorships

The most common form of business The most common form of business organization in the United States organization in the United States 73% of all firms in U.S. are sole 73% of all firms in U.S. are sole proprietorshipsproprietorshipsThe most profitable of all business The most profitable of all business organizationsorganizationsThis is a business owned and run by one This is a business owned and run by one personpersonSmallest size of business organizationSmallest size of business organization

Advantages of Sole ProprietorshipsAdvantages of Sole Proprietorships

Easy to start upEasy to start up

Easy to manageEasy to manage One owner/manager = flexibility & quick One owner/manager = flexibility & quick

decision makingdecision making

Single owner does not have to share Single owner does not have to share profits with anyone elseprofits with anyone else

Advantages of Sole ProprietorshipsAdvantages of Sole Proprietorships

Business is not recognized as a separate legal Business is not recognized as a separate legal entity; therefore, entity; therefore, owner does not have to pay owner does not have to pay separate business income taxseparate business income tax

Psychological satisfactionPsychological satisfaction: you have become : you have become successful using your own skills/creativity & you successful using your own skills/creativity & you are your own bossare your own boss

Ease of getting out of businessEase of getting out of business: all you have : all you have to do is close your shop and pay any to do is close your shop and pay any outstanding billsoutstanding bills

Disadvantages of Sole ProprietorshipsDisadvantages of Sole Proprietorships

Unlimited liability for the ownerUnlimited liability for the owner: owner is : owner is personallypersonally responsible for all of the business's responsible for all of the business's debts and lossesdebts and lossesDifficulty in raising financial capitalDifficulty in raising financial capital: : businesses need a lot of money to start up businesses need a lot of money to start up individuals often have trouble raising that kind individuals often have trouble raising that kind of money, banks are hesitant to give loans to of money, banks are hesitant to give loans to new/small businessesnew/small businessesLimited size & efficiencyLimited size & efficiency: because of limited : because of limited capital, there may not be enough personnel or capital, there may not be enough personnel or stock inventory to operate the business stock inventory to operate the business efficientlyefficiently

Disadvantages of Sole ProprietorshipsDisadvantages of Sole Proprietorships

Proprietor often has limited managerial Proprietor often has limited managerial experienceexperience: lack of “business sense”: lack of “business sense”

Small, non-established businesses have Small, non-established businesses have difficulty attracting qualified employeesdifficulty attracting qualified employees

Limited LifeLimited Life: The firm legally ceases to : The firm legally ceases to exist when the owner dies, quits, or sells exist when the owner dies, quits, or sells the business.the business.

PartnershipsPartnershipsTypes of partnershipsTypes of partnerships General Partnerships:General Partnerships:

all partners are all partners are responsible for the responsible for the management and management and financial obligation of financial obligation of the business (most the business (most common form of common form of partnership)partnership)

Limited PartnershipsLimited Partnerships: : at least one partner is at least one partner is not active in the daily not active in the daily running of the running of the businessbusiness

Forming a PartnershipForming a Partnership

Formal legal papers (articles of Formal legal papers (articles of partnership) need to be drawn uppartnership) need to be drawn up

These papers aren’t always required, but These papers aren’t always required, but are drawn up to agree upon profit sharing are drawn up to agree upon profit sharing and management decisions.and management decisions.

Partnerships make up 7% of all firms in Partnerships make up 7% of all firms in U.S.U.S.

Advantages of PartnershipsAdvantages of Partnerships

Easy to formEasy to form: :

Ease of managementEase of management: each partner : each partner brings their own unique skills to the brings their own unique skills to the organizationorganization

No special taxes on partnershipsNo special taxes on partnerships: : partners withdraw profits from the firm and partners withdraw profits from the firm and pay individual income taxes. pay individual income taxes.

Advantages of PartnershipsAdvantages of Partnerships

Partnerships can usually attract Partnerships can usually attract financial capital more easily than sole financial capital more easily than sole proprietorships.proprietorships.

Larger size of partnerships makes them Larger size of partnerships makes them more efficientmore efficient

Partnerships have an easier time Partnerships have an easier time attracting talented, qualified employeesattracting talented, qualified employees

Disadvantages of PartnershipsDisadvantages of Partnerships

In a general partnership, In a general partnership, each partner is each partner is responsible for the acts of all other responsible for the acts of all other partnerspartners… one person messes up, … one person messes up, everyone sufferseveryone suffers

The business has a The business has a limited lifelimited life

Potential for conflict between partnersPotential for conflict between partners

CorporationsCorporations

Corporations account Corporations account for 1/5 of all firms in for 1/5 of all firms in the U.S. and 90% of the U.S. and 90% of all salesall salesA corporation is a A corporation is a form of business form of business organization organization recognized by law as recognized by law as a separate legal entity a separate legal entity having all the rights of having all the rights of an individualan individual

Forming a CorporationForming a Corporation

People must ask the government for People must ask the government for permission to permission to incorporateincorporate

This is done through a corporate This is done through a corporate charter charter which is a government document giving which is a government document giving individuals the right to incorporateindividuals the right to incorporate

Corporate Formation…cont’Corporate Formation…cont’

A corporate charter specifies the number A corporate charter specifies the number of shares of of shares of stockstock, or ownership , or ownership certificates in the firmcertificates in the firm

These shares are sold to investors who These shares are sold to investors who are called are called stockholdersstockholders or or shareholdersshareholders

If the company is successful, it will issue a If the company is successful, it will issue a dividenddividend a check representing a portion of a check representing a portion of corporate earnings to each stockholdercorporate earnings to each stockholder

The Company $$$$$$$$$$ $$$$$$$$$$ $$$$$$$$$$ $$$$$$$$$$

(Stock ownership) $ 1/100th → $$$$$$$$$ $$$$$$$$$$ $$$$$$$$$$ $$$$$$$$$$ $$$$$$$$$$ $$$$$$$$$$

If a corporation has a total of 100 shares of stock, and if you could somehow divide the corporation into 100 equal parts, the owner of a single share of stock would own 1/100th of the corporation. A stockholder is someone who owns part of a company’s plant and equipment, and has a say in how the business is run

Different types of stockDifferent types of stock

Common Stock: basic ownership of a Common Stock: basic ownership of a corporation. 1 share of stock = 1 vote for corporation. 1 share of stock = 1 vote for corporate board of directorscorporate board of directors

Preferred stock: Preferred stock: Non-votingNon-voting shares, these shares, these stockholders may not vote on the Board of stockholders may not vote on the Board of directors, but they receive their dividends directors, but they receive their dividends first first

The Owners (The Shareholders) elect the…

Board of Directors who select the…

President who hires…

Vice President (Sales)

Vice President (Production)

Vice President (Finance)

Domestic

International

Quality Control

Research & Development

Payroll

Advantages of a corporationAdvantages of a corporation

Ease of raising financial capitalEase of raising financial capital: if the : if the corporation needs money, they sell stocks, corporation needs money, they sell stocks, or or bondsbonds: a written promise to repay the : a written promise to repay the debt at a later datedebt at a later date

Professional Managers run the firmProfessional Managers run the firm: : Shareholders can sit back and earn Shareholders can sit back and earn dividends, while someone they hired runs dividends, while someone they hired runs the businessthe business

Corporate advantages continuedCorporate advantages continued

Limited LiabilityLimited Liability: If a corporation goes out : If a corporation goes out of business, runs afoul of the law, etc. the of business, runs afoul of the law, etc. the shareholders lose the money they’ve shareholders lose the money they’ve invested, but are not responsible for any invested, but are not responsible for any debts incurred by the corporation.debts incurred by the corporation.Unlimited LifeUnlimited Life: the corporation is a legal : the corporation is a legal entity, so the name of the company stays entity, so the name of the company stays the same, and they continue to do the same, and they continue to do business despite changes in ownershipbusiness despite changes in ownership

Corporate DisadvantagesCorporate Disadvantages

It is expensive and difficult to get a It is expensive and difficult to get a corporate chartercorporate charter (except in Delaware) (except in Delaware) corporate charters cost thousands of corporate charters cost thousands of dollarsdollars

Shareholders have little say in how the Shareholders have little say in how the business is runbusiness is run: They turn the running of : They turn the running of the company over to the people they’ve the company over to the people they’ve hired and the board of directors hired and the board of directors

Corporate disadvantages…Corporate disadvantages…continuedcontinued

Double TaxationDouble Taxation: Stockholder’s dividends are : Stockholder’s dividends are taxed twice; once as corporate profit, then again taxed twice; once as corporate profit, then again as personal income.as personal income.

More government regulationMore government regulation: Corporations must : Corporations must register with the state they are chartered in. In register with the state they are chartered in. In order to sell their stock, they must register with order to sell their stock, they must register with the S.E.C. (securities and exchange the S.E.C. (securities and exchange commission), provide financial info. To the commission), provide financial info. To the federal government, seek federal approval federal government, seek federal approval before taking over another business, etc. before taking over another business, etc.

Are corporations people?Are corporations people?

What rights do they have?What rights do they have?

The 14The 14thth Amendment Amendment

Section 1. All Section 1. All personspersons born or naturalized in the born or naturalized in the United States, and subject to the jurisdiction United States, and subject to the jurisdiction thereof, are citizens of the United States and of thereof, are citizens of the United States and of the State wherein they reside. No State shall the State wherein they reside. No State shall make or enforce any law which shall abridge the make or enforce any law which shall abridge the privileges or immunities of citizens of the United privileges or immunities of citizens of the United States; nor shall any State deprive any person of States; nor shall any State deprive any person of life, liberty, or property, without due process of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction law; nor deny to any person within its jurisdiction the equal protection of the laws.the equal protection of the laws.

The 4The 4thth Amendment AmendmentThe right of the The right of the peoplepeople to be secure in to be secure in their persons, houses, papers, and effects, their persons, houses, papers, and effects, against unreasonable searches and against unreasonable searches and seizures, shall not be violated, and no seizures, shall not be violated, and no Warrants shall issue, but upon probable Warrants shall issue, but upon probable cause, supported by Oath or affirmation, cause, supported by Oath or affirmation, and particularly describing the place to be and particularly describing the place to be searched, and the persons or things to be searched, and the persons or things to be seized.seized.

The 1The 1stst Amendment Amendment

Congress shall make no law respecting an Congress shall make no law respecting an establishment of religion, or prohibiting the establishment of religion, or prohibiting the free exercise thereof; or abridging the free exercise thereof; or abridging the freedom of speech, or of the press; or of freedom of speech, or of the press; or of the people peaceably to assemble, and to the people peaceably to assemble, and to petition the Government for a redress of petition the Government for a redress of grievances.grievances.

Ohio EPA regulated the factory egg farms of Ohio EPA regulated the factory egg farms of Buckeye Egg. This corporation denied a regulatory Buckeye Egg. This corporation denied a regulatory body's access to their facility based on the 4th body's access to their facility based on the 4th Amendment (protection against illegal search and Amendment (protection against illegal search and seizure.) No more surprise inspections; now the seizure.) No more surprise inspections; now the EPA has to make an appointment.EPA has to make an appointment.In 1998 Omnipoint (which is now T-Mobile) was In 1998 Omnipoint (which is now T-Mobile) was denied a permit for a cell phone tower in Wellfleet, denied a permit for a cell phone tower in Wellfleet, MA. Omnipoint sued for the permit plus damages MA. Omnipoint sued for the permit plus damages and attorney's fees under the 14th Amendment and attorney's fees under the 14th Amendment (equal protection). (equal protection). In 2002 Synagro Corporation, a sludge hauling In 2002 Synagro Corporation, a sludge hauling company, sued Porter Township, PA over laws company, sued Porter Township, PA over laws aimed at stopping sewage dumping in their town. aimed at stopping sewage dumping in their town. Synagro claimed the 14th Amendment protected Synagro claimed the 14th Amendment protected them from this kind of discrimination. them from this kind of discrimination.

After Mayfield Heights, Ohio banned gas companies After Mayfield Heights, Ohio banned gas companies from drilling in its community, the Ohio legislature from drilling in its community, the Ohio legislature passed legislation to take regulation of gas wells out of passed legislation to take regulation of gas wells out of the hands of municipalities and turn it over to state the hands of municipalities and turn it over to state regulators. The bill was passed after oil and gas regulators. The bill was passed after oil and gas industry lobbyists doubled their contributions to the industry lobbyists doubled their contributions to the sponsors of the bill.sponsors of the bill.

When the Massachusetts State Legislature passed a When the Massachusetts State Legislature passed a ban on corporate contributions to political advertising, ban on corporate contributions to political advertising, a consortium of businesses sued, based on their 1st a consortium of businesses sued, based on their 1st Amendment right to free speech, and the court struck Amendment right to free speech, and the court struck down the legislation.down the legislation.

In January, 2005, the EPA agreed to permit factory In January, 2005, the EPA agreed to permit factory farms to pollute the air without restrictions, counter to farms to pollute the air without restrictions, counter to the provisions of the Clean Air Act. the provisions of the Clean Air Act.

Corporations employ millions of peopleCorporations employ millions of people

Corporations contribute millions of dollars Corporations contribute millions of dollars in tax money to state and U.S. in tax money to state and U.S. governmentsgovernments

Corporations drive the economyCorporations drive the economy

Corporations are Corporations are legally obligatedlegally obligated to make to make as much money as possible for their as much money as possible for their shareholdersshareholders