CHAPTER 3: BUSINESS ORGANIZATIONS. Section One: Forms of Business Organization. I. Forming a Proprietorship. Easiest form of business to start-needs only the occasional licenses and fees Ease of start up Relative ease of management Decisions can be made quickly. Proprietorship Advantages.
Section One: Forms of Business Organization
Relatively easy to start
Articles of Partnership: Formal legal papers which specify arrangements between partners
Ease of start up.
Articles of Partnership involves attorney fees and filing fee for the state.
Ease of management: Each partner usually brings different areas of expertise to the business.
Lack of special taxes: Partners draw profits from the firm and then pay individual income taxes at the end of the year
Usually attract financial capital more easily than a sole proprietorship
Slightly larger size = greater efficiency
Lawyers, doctors, accountants
Usually attract top talent to their organizations
Unlimited Liability: Each partner is fully responsible for the acts of all partners
Limited Partnership: The limited partner has limited liability
Investor’s responsibility for the debts of the business is limited by the size of their investment in the firm
If business fails with a large debt, the limited partner (investor) only loses their original investment, leaving the general partners to make up the rest
Defn: A form of business organization recognized by law a a separate legal entity having all as an individual.
Can buy & sell property
Enter into legal contracts and sue and besued
Account for 1/5 of the firms in the US
Account for 90% of all sales
Very formal and legal arrangement
Incorporation (or forming a corporation) must file for permission from the state where business will have be headquartered
Charter: A government document that gives permission to create a corporation if approved
States the company name, address, purpose of business, and the number of shares of stock, or ownership certificates, within the firm
Shares of stock are sold to investors called…
stockholders, or shareholders.
$$ is then used to set-up corporation
A check, or dividend, is paid to shareholders if the corporation is profitable
Investors become owners with certain ownership rights, depending on type of stock purchased:
Common Stock: Basic ownership of corporation
Owner usually receives 1 vote for each share of stock
Used to elect board of directors who direct the corporation’s business by setting policies/goals
The Board hires a professional management team to run the business on a daily basis
The dividend is variable and common stock shareholders are the last to receive a dividend or get their $$ back if corporation fails.
Nonvoting ownership shares of a corporation
These shareholders receive dividends first and they are fixed
If there are funds or property left after a business fails, preferred stockholders get their investment back first!
Preferred stockholders cannot elect the board of directors-THEY CANNOT VOTE!!
Ease of raising financial capital
Need more capital?
Sell additional stock
Borrow $$ by issuing bonds: Written promise to repay the amount borrowed at a later date
Principal: Amount borrowed to be repaid later
Interest: The price paid by the corporation for the use of another’s $$
Ease of finding professional managers
Limited liability for its owners
Corporation is fully responsible for its debts and obligations
**Because limited liability is so attractive, many firms incorporate just to take advantage of it
Unlimited life: Corporation continues to exist even when ownership changes
Because the corporation is a legal entity, the name of the company remains the same, and the corporation continues to do business
Ease of transferring ownership: If a shareholder no longer wants to be an owner, they can sell the stock
Difficult to get a charter
Depending on the state, attorneys’ fees and filing expense can cost several thousand $$
Owners/shareholders have little say in business affairs after voting for board of directors
Double Taxation: Corporate profits
Stockholders’ dividends are taxed twice: once as corporate profit and again as personal income
Lots of Government regulation:
Register with state where the Corp. is chartered
To sell stock to the public, the Corp. must register with the Securities and Exchange Commission
Provide detailed financial statements on regular basis to the general public
When taking over another business, the Corp may require federal approval
Business Regulation: In the 20th century, various consumer groups demanded regulation of giant corporations.
Federal and state governments responded by passing stronger regulations.
Rigorous regulations for banks, insurance companies, electricity, telephone, and transportation
Ex?, Sherman and Clayton Anti-trust Acts, FDIC, Federal Reserve, FCC, Dept. of Transportation
Business Development: States try to attract new industry. Offer tax credit or a reduction in taxes for a business to move to a state
Examples in TX?