Business Organizations  There are 3 main forms of

Business Organizations There are 3 main forms of business organizations: Sole Proprietorships—business run by one person, Accounts for 6% of all sales in US Partnerships (including Limited Liability Partnerships)—business jointly owned by 2 or more persons, account for smallest # of sales Corporations—business recognized by law as a separate legal entity

Advantages of Sole Proprietorships 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 leastregulated 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 Proprietorships 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, such as physical capital. Human capital can also be limited, because no one knows everything. Owner may have limited business knowledge/experience Sole proprietorships also lack permanence. Whenever an owner closes shop due to illness, retirement, or any other reason, the business ceases to exist.

Characteristics of Proprietorships Characteristics of Proprietorships By Size of Receipts 0.9% 0.4% By Type 3% 1% Under 25,000 9% 25,000 – 49,999 50,000 – 99,999 2% 13% 8% 100,000 – 499,999 500,000 – 999,999 12% 49% 1,000,000 or more Agriculture, forestry, fishing services Mining 3% Construction 5% Manufacturing Transportation Wholesale trade 70% 16% 8% Retail trade Finance, insurance, real estate Services Source: Statistical Abstract of the United States Most sole proprietorships earn modest incomes. Many proprietors run their businesses part-time.

Section 1 Review-Proprietorships 1. Any establishment formed to carry on commercial enterprises is a – (a) partnership. – (b) business organization. – (c) sole proprietorship. – (d) corporation. 2. Sole proprietorships – (a) are complicated to establish. – (b) make up about 6 percent of all businesses. – (c) are the most common form of business in the United States. – (d) offer owners little control over operations.

Partnerships Fall into 3 Categories: General Partnership – In a general partnership, partners share equally in both responsibility and liability. Limited Partnership – In a limited partnership, only one partner is required to be a general partner, or to have unlimited personal liability for the firm. Limited Liability Partnership – A newer type of partnership is the limited liability partnership. In this form, all partners are limited partners.

Advantages of Partnerships 1. Ease of Start-Up--Partnerships are easy to establish. There is no required agreement, but it is recommended that partners develop articles of partnership. 2. Shared Decision Making and Specialization-- In a successful partnership, each partner brings different strengths and skills to the business. 3. Larger Pool of Capital--Each partner's assets, or money and other valuables, improve the firm's ability to borrow funds for operations or expansion. Larger size aids in streamlining operations, increasing the ability to attract skilled employees 4. Taxation--Individual partners are subject to taxes, but the business itself does not have to pay taxes. 5. Perfect size for some markets (law, doctors, etc.)

Disadvantages of Partnerships Unless the partnership is a limited liability partnership, at least one partner has unlimited liability. General partners are bound by each other’s actions. Partnerships also have the potential for conflict. Partners need to ensure that they agree about work habits, goals, management styles, ethics, and general business philosophies.

Section 2 Review-Partnerships 1. What advantage does a partnership have over a sole proprietorship? – (a) The responsibility for the business is shared. – (b) The business is easy to start up. – (c) The partners are not responsible for the business debts. – (d) The business is easy to sell. 2. How is a general partnership organized? – (a) Every partner shares equally in both responsibility and liability. – (b) The doctors, lawyers, or accountants who form a general partnership hire others to run the partnership. – (c) No partner is responsible for the debts of the partnership beyond his or her investment. – (d) Only one partner is responsible for the debts of the partnership.

Corporations Corporations receive a charter from the government and sell stock. People who buy stock are the owners of the company and elect officers to run the company. Accounts for the overwhelming majority of sales. A corporation is a legal entity, or being, owned by individual stockholders. Stocks, or shares, represent a stockholder’s portion 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 boards of directors

Advantages of Incorporation Advantages for the Corporation Advantages for the Stockholders Individual investors do not carry responsibility for the corporation’s actions. Shares of stock are transferable, which means that stockholders can sell their stock to others for money. Corporations have potential for more growth than other business forms. Corporations can borrow money buy selling bonds. Corporations can hire the best available labor to create and market the best services or goods possible. Corporations have unlimited lives

Disadvantages of Incorporating Difficulty and Expense of Start-Up--Corporate charters can be expensive and time consuming to establish. A state license, known as a certificate of incorporation, must be obtained. Double Taxation--Corporations must pay taxes on their income. Owners of stock also pay taxes on dividends, or the portion of the corporate profits paid to them. Loss of Control--Managers and boards of directors, not owners, manage corporations. More Regulation--Corporations face more regulations than other kinds of business organizations.

Government Regulation of Corporations SEC Securities and Exchange Commission— regulates stock trading, insider trading (Martha Stewart, you’re going down!) Public utilities have controls put on the rates they charge (electricity, gas, etc.). They are legal monopolies because to have too many companies putting out so much capital would be wasteful. State and local governments often offer industrial development blonds to help industries relocate or tax breaks to draw investments

Corporate Growth/Combinations Growth happens in several ways: Reinvestment: Companies reinvest profits to expand production, purchase more efficient capital goods (machinery), renovate factories, pursue better laborers. Businesses estimate cash flow, subtract expenses, taxes, and depreciation to determine profit. Then you decide whether part of the cash flow should be reinvested to generate additional sales and profits. Mergers: Companies combine operations, elect 1 board of directors. (AOL-Time Warner) A conglomerate is a business combination merging more than three businesses that make unrelated products. (GE owns NBC and various other units)

Corporate Mergers Merged companies give up their separate identities Mergers happen because companies ant to grow faster, become more efficient, diversify operations, acquire or deliver a better product (Daimler-Benz wanted Chrysler minivans and Jeeps). Mergers are also creative ways of eliminating rivals and changing the image of a company. Daimler-Benz essentially “took over” Chrysler. Some companies are just a “good buy” Usually must be approved by both U.S. and European regulators (it’s not that the countries lack sovereignty, but the business won’t be able to do business in some countries if it isn’t approved)

Types of Mergers Horizontal mergers combine two or more firms competing in the same market with the same good or service. (Burger King/McDonald’s merger) Vertical mergers combine two or more firms involved in different stages of producing the same good or service. (General Motors and a bank merge)

Multinational Corporations Multinational 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 Review 1. All of the following are advantages of incorporation EXCEPT – (a) The responsibility for the business is shared. – (b) Capital is easier to raise than in other business forms. – (c) Corporations face double taxation. – (d) Corporations have more potential for growth. 2. A horizontal merger – (a) combines two or more firms involved in different stages of producing the same good or service. – (b) combines two or more partnerships into a larger partnership. – (c) combines two or more firms competing in the same market with the same good or service. – (d) combines more than three businesses producing unrelated goods.

Franchises A business franchise is a semiindependent 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 systems, then local franchise owners help to produce and sell those products Franchises allow owners a degree of control, as well as support from the parent company

Advantages and Disadvantages of Business Franchises Disadvantages of Business Franchises Advantages of Business Franchises Management training and support Standardized quality National advertising programs Financial assistance Centralized buying power High franchising fees and royalties Strict operating standards Purchasing restrictions Limited product line

Cooperatives A cooperative is a business organization owned and operated by a group of individuals for their shared benefit Consumer Cooperatives Retail outlets owned and operated by consumers are called consumer cooperatives, or purchasing cooperatives. Consumer cooperatives sell their goods to their members at reduced prices. They often buy goods in bulk, for example. Service Cooperatives Cooperatives that provide a service, rather than goods are service cooperatives. (Credit Unions) Producer Cooperatives Producer cooperatives are agricultural marketing cooperatives that help members sell their products.

Nonprofit Organizations Institutions 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 Review 1. A business franchise – (a) attempts to improve the image and working conditions of people in a particular occupation. – (b) operates without the aim of profit. – (c) is a semi-independent business tied to a parent company. – (d) is not required to pay income taxes. 2. Consumer cooperatives – (a) are owned and operated by consumers. – (b) provide a service, rather than a good. – (c) help members sell their agricultural products. – (d) pay no income tax.