BUSINESSORGANIZATIONS

Chapter 8

– Oldest form of business organization•“Proprietor” comes from Latin for

“property”

– Owned and run by one person (family)– Smallest in size– Most numerous type of business

organization (70%)….– BUT have smallest percentage of

sales/income (4%)– Can represent almost any type of

business. Examples?

Sole Proprietorship

Advantages of Proprietorships:

• Easiest to organize & get started – just get a business license– Least amount of business

regulations

• Least expensive to run – management decisions easy

• Owner is his/her own boss with potential for great individual profit

• Don’t have to pay separate business income taxes

Disadvantages of Proprietorships:• UNLIMITED LIABILITY (personal liability)

for all debts of the business• Income taxed directly to the person, not

business• Difficult to raise a lot of financial capital• Size & efficiency (may not be able to hire

enough people or stock enough inventory)• Owner may have limited business/managerial

experience (will have to hire for things he can’t do)• Difficult to attract qualified employees (lack of

fringe benefits)

• Limited life of business (gone when owner dies, quits, sells)

PARTNERSHIPS• Owned jointly by 2 or more

persons• Least numerous – only 9% • Second smallest percentage of

sales/income (12%)• 3 types:

1. General - all partners share in responsibility and liability – all manage the business. All partners have unlimited liability. Examples?

2. Limited• Managing/General partners are actively responsible

and have unlimited liability for debts of the business (only one required to be a General Partner)

• Limited partners are inactive, investment partners/ have only limited liability

PARTNERSHIPS

• 3. Limited Liability Partnership– LLP– Allowed by some states– ALL of the partners are limited partners– ALL of the partners have limited

liability….for certain situations such as the mistakes made by another partner

– Used by professionals such as doctors, lawyers, accountants, etc.

• Generally will have a legal partnership agreement

Advantages of Partnerships• Ease of start-up; little gov’t regulation• Ease of management – usually different

partners have control over different areas of expertise

• Brings more resources/specialties into the business than a proprietorship

• Less difficult to raise financial capital– Can always take in new partners to get more

funds• Larger size can lead to more efficiency• Easier to attract qualified employees

(most partnerships offer specialized services & so are a bigger draw to new hires)

• Do not have to pay separate business income taxes but……

Disadvantages of Partnerships:• In a General Partnership, each partner

is liable for the acts of ALL the other partners

• In a General Partnership, there is unlimited liability (personal liability) for ALL debts of the partnership business

• Limited life – must be dissolved or reorganized when partner dies or leaves

• Conflict between partners often occurs• Loss/death of a partner often causes partnership to dissolve

CORPORATIONS• Largest & most profitable type

– 80% of all sales• Unique – recognized by the law as a

separate legal “person” – can buy & sell property, enter into legal contracts, sue & be sued

• Formal, legal requirements to incorporate• Ownership evidenced by shares of stock

– Stockholders/shareholders own the percentage of the company represented by the shares of stock they own

– Shareholders may receive dividends – a portion of the corporation’s earnings – they would be based on # of shares of stock owned

CORPORATIONS

• Types of corporations:– Privately held or Closely held – few stockholders,

family; don’t sell it– Publicly held – lots of stockholders; bought and sold

on the stock exchanges• Control of the corporation:

– Shareholders elect a Board of Directors– Directors appoint corporate officers like CEO or President,

etc.– Officers hire managers, employees, etc.

Advantagesof Corporations:

• Ease of raising financial capital – pool small sums of $ from lots of different people

• LIMITED LIABILITY – investors are liable/responsible ONLY for the amount of $ they spent on the stock – the corporation itself is liable for the debts of the corporation

• Ease of transferring ownership – sell your stock!• Perpetual/unlimited life – corporation will always

continue to exist even when ownership changes• Can afford/draw professional managers to run

the company (& owners don’t really need to know how to run a business)

Disadvantages

• Difficulty & expense of organizing

• Owners/shareholders have little input in running of business since ownership and management are separate

• Can lose majority ownership through sale of too much stock

• DOUBLE TAXATION of corporate profits – stockholders’ dividends are taxed twice – once as profit to the corporation & again as personal income to the stockholder

• More gov’t regulation than proprietorships or partnerships (chartering by state, stock exchange regulations, etc.)

A New Form of Corporation :

• Limited Liability Corporations

• Easier to organize than regular corporation

• BUT, can’t go public (sell stock to the public on stock exchange)

• DON”T get double taxation – treated as a partnership for tax purposes

• Less paperwork – no annual minutes, notification of shareholder meetings, etc.

• Flexible organization – no rules on shareholders; less formal to run

Comparison of Sole Proprietorships, Partnerships, and Corporations

By Number of Businesses By Sales $$’s

Sole Proprietorships

Partnerships

Corporations

Corporations

Sole Proprietorships

BUSINESSEXPANSION

• 2 METHODS:– Reinvestment

•Use profits & cash flow to grow the business

– Merger•Combining with another firm

– To be bigger/more efficient– To acquire new product lines– To catch up to or eliminate rivals

•2 TYPES OF MERGERS:– Horizontal– Vertical

HORIZONTAL INTEGRATION

• Combination of companies in asimilar line of work

+ =

+ =

Hewlett Packard + CompaqMercedes + Chrysler

Cingular + AT&T

+ Disney + Pixar

VERTICALINTEGRATION

• Combination of companies in the same supply line

+

+

+

=

Disney + ABC = entertainment + broadcasting

Time-Warner + Turner = cable TV + programming

CONGLOMERATES

• A company that contains at least 3 or more unrelated businesses – none are majority of

company’s sales– Purpose is

diversification

+

+

+

+

=

Example of a Conglomerate:

Financial services + broadcasting (NBC) + jet engines + appliances + medical equipment + locomotives

MultinationalCorporations

• Has manufacturing or service operations in a # of different countries

• Generally pays taxes in each country where it has operations

• Could be a conglomerate• Generally welcomed since they bring new

technology & jobs & new consumer goods• Downside – low wages to overseas

workers

FRANCHISES• Solve the problem of sole proprietors not

having enough resources/skills• Business arrangement where a business

(franchisee) pays fees to a parent corporation (franchiser) for the right to sell its product in an exclusive area

• The franchisees must run their personal businesses according to the dictates of the franchisor and must buy supplies, etc. from franchisor.– The reason why the stores all look very similar– Franchisers do try and help franchisees be successful with their businesses

FRANCHISES• They get capital and other resources, such

area-wide or nation-wide advertising, from the franchiser in return for giving up the majority of the decision-making in business

• WHY else do they do it?– NAME RECOGNITION!!!– Also get training, support, quality products, etc.

• Disadvantages of Franchises?– HIGH FEES!– ROYALTIES! – percentage of profits paid to

franchiser– No control over operating standards, restrictions on purchasing, etc.

A Different Type of Franchise

Organization

Headquarters

Company Owned and Operated Stores

Franchisee Owned and Operated Stores

COOPERATIVES• Voluntary association of people to carry on

some activity that will benefit all its members• Not taxed like corporations

– Types:•Consumer goods - buys goods in bulk,

such as food and clothing – sell at lower prices to their members

•Services – provide services rather than goods; credit unions use member funds and give favorable loan rates

•Producers – mostly agricultural– Help with the marketing, storage,

production, and distribution of farm/dairy products

NONPROFITORGANIZATIONSTo benefit the public

• Schools, churches, hospitals, museums, etc.

• Legally incorporated to take advantage of limited liability/unlimited life

• No dividends – don’t pay income taxes• Use any “profits” to further the work of

their organization• Seek to do good, improve

business, educational standards,health

Examples of Professional Associations:

•Innkeepers•Doctors (AMA)•Lawyers (ABA)•Professional Engineers

•Nurses•Human Resource Professionals•Motion Picture Arts and Science

PROFESSIONAL ASSOCIATIONS

• Groups of people in specialized occupations

• Work to improve conditions, public perceptions, knowledge, skills and techniques

• Some have voluntary membership, some mandatory