Business organizations

1. Business organizations • Getting started • Getting started • Entrepreneurs – people who decide to start a business and are willing to take risks. • People usually decide to start a business to gain profits, to “do something on their own” or to be their own boss. • People who decide to start a business must gather information about the factors of production for the product (good or service), and decide on the form of business organization that best suits their purposes. (we’ll look at the types of business organizations in sect 2 & 3) a. Also, they need to learn as much as possible about the business they plan to start – such as, the laws, regulations, and tax codes that will apply to the business

2. 4. Help from the government a. Federal and state government offer help to small businesses i. Federal government’s small business administration – help finance new small businesses to get them started. ii. State departments of commerce and community affairs offer assistance iii. Many community colleges and universities have small business development centers that are federally funded to help small businesses get started iv. Small business incubator – a private or government funded agency that helps new businesses by providing advice or low rent buildings and supplies. 5. Help from the internet a. The internet has a great deal of information – web sites that explain everything from putting together a business plan to learning the “secrets to success”

3. B. Elements of business operation 1. Every business must consider 4 basic elements: expenses, advertising, record keeping and risk. a. Expenses – new equipment (or maybe replacement parts), wages (to yourself or others), insurance, taxes, electricity, telephone service, inventory, rent, etc. b. Advertising – information about your business and the service/product you are selling: flyers printed and distributed to advertise your business, ads in the newspaper, web sites, etc. c. Record keeping – you must have a system to track your expenses and income: probably need a computer and different programs – such as programs that write checks, calculate your monthly profits and losses, keep track of your inventory, etc. i. key pt = it’s very important to keep very accurate records for tax purposes. Business purchases can be deducted from the amount of taxes you owe d. Risk – every business involves risks. You must balance the risks against the advantages of being in business for yourself

4. Sole proprietorships and partnerships – there are many different ways that businesses can be organized in the U.S., but the 2 most common are sole proprietorships and partnerships • Sole Proprietorships • A business owned by one person, known as the proprietor. • It’s the oldest and most common form of business organization • In the U.S. there are more than 17 million sole proprietorships

5. B. Advantages 1. They usually are easier and less expensive to start and run 2. No or little red tape involved – exception may be gov’t requirement of certain licenses and fees 3. The owner has direct control over all operations – no co- owner, boss, or “higher up” to consult when decisions must be made quickly; gives flexibility 4. Owner enjoys the profits of good management without having to share them, but also is responsible if there is a loss. 5. The business is tax exempt – owner only pays individual income tax on the profits taken from the business. 6. The psychological factor – personal satisfaction, freedom of being own boss, see themselves as a great success story, etc. 7. Easy to get out of the business if the owner decides to do so 8. Ex = lemonade stand, mow lawns, grocery store, gas station, restaurant, etc.

6. C. Disadvantages: 1. Losses not shared 2. Unlimited liability = means the owner is personally responsible for all debts and damages from doing business 3. If the business is unable to pay its bills, the owner can be forced to sell personal assets as well as the business to pay debts 4. Owner may have limited managerial experience – a lack of “business sense”, but must make all business decisions which can be demanding and time consuming 5. Difficulty in borrowing large amounts of money – banks and other lenders don’t like to lend money to new or very small businesses. Forces one to tap personal savings or to borrow from family and friends. 6. If the owner dies, goes bankrupt, or is unwilling or unable to work, the business will probably fail. 7. Uncertainty about the future increases the risk both to employees and creditors

7. II. Partnerships A. A business owned and operated by 2 or more people B. Partners sign a legally binding agreement describing the duties of each partner, division of profits, and the distribution of assets should the partnership end.

8. C. Advantages 1. Easy to establish and run 2. Losses are shared – partners may survive a loss that might bankrupt a sole proprietor 3. Partners share control and profits and they feel pride in owning and operating their own business. 4. Usually more efficient than a sole proprietorship – each partner works in an area of the business that he/she knows the most about or is best at doing 5. The business is tax exempt – partners only pay individual income tax on their share of profits. 6. Because of larger size, banks and other lenders are often willing to lend more money. Also, you may take in new partners (for a price)

9. D. Disadvantages 1. Unlimited liability – each partner is fully responsible for the acts of all other partners – if a partner can’t pay their share of a debt, the others must make up the difference 2. Disagreements can lead to problems in running the business – you need to be extremely careful in choosing a business partner. 3. If a partner leaves or dies, the partnership must be ended and reorganized

10. E. Limited partnerships 1. A special form of partnership in which the partners are not equal a. One partner is called the General Manager and this person or persons assumes all of the management duties and has full responsibility for the debts of the limited partnership. b. Other partners are “limited” because all they do is contribute money or property 2. Advantage to limited partners – no liability for the losses beyond what they initially invest 3. Disadvantage to limited partners – no say in how the business is run

11. F. Joint ventures 1. A temporary partnership set up for a specific purpose for a short period of time 2. The joint venture is dissolved after it has accomplished its goal

12. Student response • If you were starting your own business what type of business would it be and what type of organization would you choose? Why

13. The corporate world and franchises • Why form a corporation? • The need for financial capital (your business has done well and you want to expand, update equipment, etc. but you don’t want any more partners. • What you want is financial backers who will lend funds without having a hand in running the business

14. II. What is a corporation? A. A corporation is an organization owned by many people but treated by law as if it were a person B. A corporation can own property, pay taxes, make contracts, sue and be sued. C. A corporation has a separate and distinct existence from the stockholders who own corporate stock 1. Stock = represents ownership rights to a certain portion of the future profits and assets of the company that issues the stock D. Corporations make up only about 20% of all businesses but earn 90% of all business revenues. E. A major advantage of a corporation is Limited Liability – if a corporation goes bankrupt or is sued, only the business loses money and assets. Creditors can’t normally take personal property. F. A major disadvantage of a corporation is that they are taxed more heavily than other forms of business

15. III. Corporate structure – to form a corporation, the founders must do 3 things: 1st register with the state government. 2nd – sell stock. 3rd – elect a board of directors A. Registering the corporation 1. You must register the corporation in the state where it will be headquartered. 2. You file an Article of Incorporation which includes: a. The name, address, and purpose of the corporation b. Names and addresses of the initial Board of Directors (which serve until the 1st stockholders’ meeting at which time a new board may be elected) c. The number of shares of stock to be issued. d. The amount of money capital to be raised through issuing stock

16. 3. If the articles are in agreement with state law, the state will grant a Corporate Charter – this allows the corporation to operate in that state a. Also at this time bylaws are written – these are a set of rules describing how the board of directors will be elected, how stock will be sold and dividends paid, and a list of the duties of the company’s officers

17. B. Raising capital by selling stock 1. Common stock a. Gives the investor part ownership in the corporation b. A right to a percentage of the company’s future profits (after holders of preferred stock are paid) c. Voting rights at the annual stockholders’ meeting d. It does not guarantee a dividend ( a money return on the money invested in a company’s stock) 2. Preferred stock a. Investors don’t have voting rights in the corporation b. Investors are guaranteed a certain amount of dividend each year. c. If the corporation goes out of business, holders of preferred stock have 1st claim on whatever value is left in the company after the creditors have been paid C. Naming a board of directors 1. Stockholders elect a board of directors who will supervise and control the corporation by hiring people to run the day-to-day operations of the business

18. IV. Franchises A. Franchise = contract in which 1 business (the franchiser) sells to another business )the franchisee) the right to use the franchiser’s name and sell its products. Ex = fast food, hotels, gas stations B. The business buying it (the franchisee) agrees to pay a certain fee plus a portion of the profits for as long as the business stays in operation. C. Franchises usually help set up the business and have training programs to teach the franchisee about the business and set the standards of business operations

19. Student response • What are the differences between corporations and other forms of business?