Business Organizations

Business Organizations Chapter 8

Sole Proprietorships • Business organization is an establishment formed to carry on a commercial enterprise • Sole Proprietorships • Are the most common type of business organization • Managed by a single individual • That person earns all profits, is responsible for all of the firms debts

Sole Proprietorships • Advantages • Easy to start up- small amount of paperwork and legal expense • 1. obtain a business license • 2. Obtain a site permit for physical business • 3. Register business name • Relatively few regulations • Least regulated form of business • Subject to health codes, zoning laws • Sole receiver of profit • Owner keeps all profits after taxes • Full Control • Owner can run business as they wish • Can respond quickly to changes in the marketplace • Easy to discontinue • After all debts and obligations paid there are no other legal obligations to business

Sole Proprietorships • Disadvantages • Biggest disadvantage is liability (legally bound obligation to pay debts) • Sole proprietors are personally responsible for all business debts (unlimited liability) • Limited access to resources • Difficult to expand business • Hard to acquire funding and loans from banks • Hard to find employees- can’t offer security, advancement or fringe benefits of larger business organizations • Lack of permanence • Has a limited life • Death, retirement, loss of interest by owner business ceases to exist

Partnerships • A business owned by two or more persons who agree on a specific division of responsibility • Three different types of partnerships • General Partnership • All partners share equally in responsibility and liability • Limited Partnership • Only one partner has unlimited personal liability for the firms actions • Other partners do not actively run business • Limited partners can only lose initial investment • Limited Liability Partnerships • New type of business organization • All partners protected from liability in certain situations

Partnerships • Advantages • Ease of start-up • Written partnership agreements called articles of partnership spell out each partners rights and responsibilities • Uniform Partnership Act • uniform state law adopted by most states that establish rules for partnerships • Requires common ownership interest • Profit and loss sharing • Shared management responsibilities • Partnerships are subject to few government regulations • Shared decision making • Each partner bring different strengths and skills to the business • Larger pool of capital • More assets improve the ability to expand business and borrow funds • Easier to attract employees • Taxation • Partners pay taxes only on their profits

Partnerships • Disadvantages • Unlimited liability, except in LLP or LP • In LP general partner has unlimited liability • Lack of absolute control • Potential for conflict between partners

Corporations, Mergers and Multinationals • Most complex form of business organization • Corporation is a legal entity • Owned by individual stockholder, each stockholder has limited liability for firm’s debts • Stock is a share of ownership in a corporation • Corporation is considered a legal entity • It pays taxes • Engages in business • Makes contracts • Can sue other parties, and get sued • Two types of corporations • Closely held corporations • stock held by a few people • Stock rarely traded • Publicly held corporations • Many shareholders • Stocks bought and sold on the open market (stock exchanges) • All corporations have the same basic structure • Stockholders elects a board of directors to make major decisions for the for corporation • Board hires professional managers to run day to day business

Corporations, Mergers and Multinationals • Advantages of Incorporation • Limited liability to owners • Individual investors do not responsible for corps. actions, lose only money they have invested in business • Transferrable ownership • Stockholders can sell stocks to others • Ability to attract capital • Easier to grow company • Can sell stocks to raise capital • Can sell bonds (a formal contract to repay borrowed money at a fixed rate at intervals) • Long life • Company outlasts original owners, can do business indefinitely

Corporations, Mergers and Multinationals Disadvantages of Corporations • Difficult and expensive to set up • Must file for state corporate charter (certificate of incorporation) • Double Taxation • Corporations are legal entities and need to pay taxes on their income • Stockholders also pay taxes on their dividends (portion of corporate profits paid to stockholders) • When stockholders sell their stock pay a tax called capital gains tax if they make a profit • Loss of control • Professional managers don’t always act in the best interest of the company • More regulation • Must hold annual meetings for shareholders • Publically traded companies required to make annual reports to the Securities Exchange Commission

Corporations, Mergers and Multinationals Corporate Combinations • Companies combine with other companies to create larger more efficient firms • Can sell goods at a lower price Three types of mergers • Horizontal Merger • Two or more companies that compete in the same market and provide the same good or service • Try to improve efficiency, reduce costs and boost revenue • Monitored closely by the federal government so they do not create a monopoly • Vertical Merger • Companies involved in different stages of producing good or service • New firm can control all phases of production • Typically do not lessen competition • Conglomerate • Buy companies that produce unrelated goods • Have more that three businesses that produce unrelated products • One business earns a majority of the firms profits

Corporations, Mergers and Multinationals Multinational Corporations • Produce goods throughout the world • Operate in more than one country at a time • Must obey laws and pay taxes in all countries where they operate • Many have operating budgets bigger than most governments • Advantages • Provide jobs • Spread technology • Help poorer nations improve their standard of living • Disadvantages • Have too much influence over culture and politics in countries where they operate • Working conditions are poor

Other Organizations Business franchise • Semi independent business that pays fees to parent company • In return it has the exclusive right to sell a certain product in a given area • Franchiser (parent company) develops products and works with local franchise to produce and sell product • Allows owners a degree of control and owners benefit from support of parent company

Other Organizations Advantages • Come with a built in reputation • Management and training support • Standardized quality • owners follow certain rules and processes to guarantee product quality • National advertising • Financial assistance • Centralized buying power • buy materials in bulk to keep costs down Disadvantages • High franchising fees and royalties • Royalties are a share of earnings • Strict operating standards • Must follow all rules in the franchise agreement • Purchasing restrictions • Limited product line • can only sell approved products

Other Organizations Cooperatives • Business owned and operated by a group of individuals for their shared belief • Three categories • Consumer Cooperatives (purchasing cooperatives) • Sell merchandise to their members at reduced prices • Make large purchases in bulk to obtain goods at a lower cost • Service Cooperatives • Provide a service at a discounted price • Producer cooperatives • Help members sell their products (usually agricultural products)

Other Organizations • Nonprofit Organizations • Business that does not operate for a profit • Usually tries to benefit society • Exempt from income taxes • Some operate with partial government support • Almost all provide services rather than goods • Professional Organizations • Improve image, working conditions, set codes of conduct and skill of people in particular occupations • Labor Unions • Organized group of workers • Attempt to improve working conditions, wages and fringe benefits

Business Organizations