Chapter 8: Business OrganizationsChapter 8: Business Organizations 1. Sole Proprietorship1. Sole Proprietorship 2. Partnerships and Franchises2. Partnerships and Franchises 3. Corporations, Mergers, and Multinationals 3. Corporations, Mergers, and Multinationals 4. Nonprofit Organizations 4. Nonprofit Organizations

Why do some business fail and some succeed!

Alan, it’s a pleasure doingBusiness with you!

No Mr. PetermanThe pleasure is all

Mine!

What business organization (s) do you suppose this suggests?

Business organizationsBusiness organizations the ownership structure of a company or a firmthe ownership structure of a company or a firm ExamplesExamples-- sole proprietorship, partnership, franchise, or a sole proprietorship, partnership, franchise, or a

corporation, non profitcorporation, non profit

1. Sole Proprietorship1. Sole Proprietorship A business owned and managed by a single individualA business owned and managed by a single individual

Unlimited Personal Unlimited Personal LiabilityLiabilityLimited Access to Limited Access to ResourcesResourcesLack of PermanenceLack of Permanence

Ease of start upEase of start upFewer RegulationsFewer RegulationsSole receiver of Sole receiver of profitprofitFull Control Full Control Easy to Easy to discontinuediscontinue

Sole Sole ProprietorshipsProprietorships

DISADVANTAGESDISADVANTAGESADVANTAGESADVANTAGES

Advantages of Sole Proprietorships Advantages of Sole Proprietorships

Easy Start and EndEasy Start and End --business licensebusiness license-- authorization from the authorization from the government to operate a businessgovernment to operate a business

Relatively few regulationsRelatively few regulations --atat the most zoning lawsthe most zoning laws--designates designates certain zones as residential or businesscertain zones as residential or business

Sole Receiver of ProfitSole Receiver of Profit –– does not have to split the billdoes not have to split the bill

Full ControlFull Control –– makes all major decisions (hopefully consults wife)!makes all major decisions (hopefully consults wife)!

Easy to discontinueEasy to discontinue –– not doing well, easy to escape!not doing well, easy to escape!

Disadvantages of Sole Proprietary Disadvantages of Sole Proprietary

Unlimited Personal LiabilityUnlimited Personal Liability -- the legal obligations to pay debtsthe legal obligations to pay debts Limited Access to ResourcesLimited Access to Resources –– you have to pay for all your you have to pay for all your

materials (land, labor, capital)materials (land, labor, capital) Lack of PermanenceLack of Permanence -- lack resources to give fringe benefits, lack resources to give fringe benefits,

payments other than salary; no securitypayments other than salary; no security

Characteristics By Tax ReturnCharacteristics By Tax Return

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7 Under $25,000

$25,000 - $49,000

$50,000 - 99,999

$100,000 - $499,000

$500,000 - $999,999

$1,000,000 or more

What is the highest profit by tax return for a sole proprietorship? Why least?

Characteristics by TypeCharacteristics by Type

0

0.05

0.1

0.15

0.2Real Estate

Finance and Insurance

Retail

Manufacturing

Construction

Agriculture

Accomodation and Food Service

Healthcare and Social Assistance

Administrative Support and Waste

Management, Technical Supporting

Professional, Scientific, Tech

Other, including legal

What percentage engaged in retail over Healthcare?

2. Partnerships and Franchises2. Partnerships and Franchises

A business organization owned by two or more persons who A business organization owned by two or more persons who agree on a specific division of responsibilities and profitagree on a specific division of responsibilities and profit

Partnerships can range in size from a pair of house painters to an accounting firm with thousands of partners.

Types of PartnershipsTypes of Partnerships GeneralGeneral --all partners are equalall partners are equal Limited Limited -- only one partner is a generalonly one partner is a general Limited LiabilityLimited Liability --all partners are limited personal liabilityall partners are limited personal liability

Advantages of PartnershipsAdvantages of Partnerships Ease of Start UPEase of Start UP –– Articles of PartnershipArticles of Partnership--contract that spells out each contract that spells out each

partners rights and responsibilitiespartners rights and responsibilities Financial ImpactFinancial Impact –– more than one contributingmore than one contributing Shared Decision MakingShared Decision Making –– responsibilities are shared by responsibilities are shared by

individualsindividuals

Disadvantages of PartnershipsDisadvantages of Partnerships Unlimited LiabilityUnlimited Liability -- if one suffers they all doif one suffers they all do Potential for ConflictPotential for Conflict --cant we all just get alongcant we all just get along Lack of PermanenceLack of Permanence --may come and gomay come and go

Partnerships by Tax ReturnPartnerships by Tax Return

Under$25,000

$25,000 -$49,000

$50,000 -$99,000

$100,000 -$499,000

$500,000 -$999,000

$1,00,000 ormore

53%

8%

9%

17%

8%5%

•What income poses in the most profit in a partnership?

•How about the least?

•How did this compare to proprietorship?

Partnership by TypePartnership by TypeReal Estate

Finance andInsuranceRetail

Manufacturing

Consruction

Agriculture

Accommodation andfood servicesHealthcare

Management

Professional

Other, legalUsing the data, describe partnerships in terms of industry and income.

Why do you think real estate businesses form the largest percentage of partnerships?

7%

48%7%

2%

2%

2%

11%6%

6%

5%

4%

Business FranchisesBusiness Franchises Is a independent business that pays fees to a parent companyIs a independent business that pays fees to a parent company Examples from fast food restaurants to jewelry storesExamples from fast food restaurants to jewelry stores

Advantages of FranchisesAdvantages of Franchises Managing Training and SupportManaging Training and Support –– franchises offer training and franchises offer training and

support programssupport programs Standardized QualityStandardized Quality –– certain rules and processes to guarantee certain rules and processes to guarantee

product quality product quality National Advertising ProgramsNational Advertising Programs –– parent companies pay and you parent companies pay and you

dondon’’t have to payt have to pay Financial AssistanceFinancial Assistance –– Some franchisers provide financing to Some franchisers provide financing to

help owners start their businesshelp owners start their business Centralized Buying PowerCentralized Buying Power –– buying materials in bulk for all their buying materials in bulk for all their

locationslocations

Disadvantages of FranchisesDisadvantages of Franchises High Fees and RoyaltiesHigh Fees and Royalties ––Franchises charge high fees to use Franchises charge high fees to use

their name, they also expect royaltiestheir name, they also expect royalties Strict Operational StandardsStrict Operational Standards ––strict rules such as hours of strict rules such as hours of

operation, dress codes, and operating proceduresoperation, dress codes, and operating procedures Purchasing RestrictionsPurchasing Restrictions –– franchises can only buy from the franchises can only buy from the

parent companyparent company Limited Product LineLimited Product Line –– offer only approved productsoffer only approved products

Global Business, Local TasteGlobal Business, Local Taste

0 10,000 20,000 30,000

2003

2005

2007 Foreign UPS

Foreign Subway

Foreign McDs

Domestic UPS

Domestic Subway

Domestic McDs

3. 3. Corporations, Mergers, and Corporations, Mergers, and MultinationalsMultinationals

A legal entity, or being, owned by individual stockholders, eachA legal entity, or being, owned by individual stockholders, each of whom of whom has limited liability for the firmhas limited liability for the firm’’s debtss debts

A stock A stock --a certificate of ownership in a corporationa certificate of ownership in a corporation

Under $25,000

$25,000 - $49,000

$50,000 - $99,000

$100,000 - $499,000

$500,000 - $999,000

$1,000,00 or more

24%18%

11%

31%

10%

6%

By Tax Return

•What percent is under $25,000?

•What income represents the least among of corporations owned by individual stock holders? How about the most?

Types of CorporationsTypes of Corporations Closely held corporationsClosely held corporations --issues stocks to only a few people, issues stocks to only a few people,

who are often family memberswho are often family members Publically held corporationsPublically held corporations --sells stock on the open marketsells stock on the open market Five groups of people: stockholders, board of directors, Five groups of people: stockholders, board of directors,

corporate offices, managers, and employeescorporate offices, managers, and employees

Stockholders

Board of

directors

Corporate officers

Corporate officers

Employees

Mangers

INVEST IN MY CORPORATION

By TypeBy Type

Real Estate

Finance and Insurance

Retail

Manufacturing

Construction

Agriculture

Accomodation and Food Services

Healthcare and Social Assistance

Management

Professional

Other services, including legal

12%

5%

12%

6%

14%

3%

6%

7%

4%

15%

12%

Approximately 38% of corporations are engaged in construction, manufacturing, real estate, and retail business. What incentives to incorporate do businesses have in these industries? Firms that sell services make up a large fraction of corporations. Given this fact, what can you conclude about the U.S. Economy?

Advantages of IncorporationAdvantages of Incorporation

Limited liability for ownersLimited liability for owners -- advantage for Stockholders because you advantage for Stockholders because you dondon’’t carry personal responsibility for the corporationt carry personal responsibility for the corporation’’s actions! You s actions! You will lose or gain only the amount of money you have invested in will lose or gain only the amount of money you have invested in the the business.business.

Advantage for a corporationAdvantage for a corporation –– by selling shares they can raise large by selling shares they can raise large amounts of capitalamounts of capital

Ability to attract capital by use of bondsAbility to attract capital by use of bonds --promise to repay borrowed promise to repay borrowed money with interest at fixed variables money with interest at fixed variables

Transferable ownershipTransferable ownership –– shares of stocks are easily transferable; not shares of stocks are easily transferable; not the case with other business organizationsthe case with other business organizations

Long life or permanenceLong life or permanence --because stocks are transferable, because stocks are transferable, corporations can last longer that partnerships and sole proprietcorporations can last longer that partnerships and sole proprietorshipsorships

Incorporation, or forming a corporation, offers advantages to both stockholders and the corporation itself.

Disadvantages of IncorporationDisadvantages of Incorporation Expense and difficulty of start upExpense and difficulty of start up --certificate of incorporationcertificate of incorporation--a a

license issued by the state government YOU MUST FILE!!!license issued by the state government YOU MUST FILE!!! Double taxationDouble taxation --corporations legal entities separate from their owners corporations legal entities separate from their owners

MEANS MUST PAY TAXES ON IT!!!MEANS MUST PAY TAXES ON IT!!! Dividends Dividends --portion of corporate profits paid out to stockholdersportion of corporate profits paid out to stockholders Stockholders have to claim dividends as personal incomeStockholders have to claim dividends as personal income Limited Liability Corporations Limited Liability Corporations –– advantage of limited liability for advantage of limited liability for

owners and tax advantage; do not pay corporate income taxowners and tax advantage; do not pay corporate income tax Potential loss of control by the foundersPotential loss of control by the founders ––corporate officers and corporate officers and

boards of directors, not owners, manage corporations and sometimboards of directors, not owners, manage corporations and sometimes es they make very bad decisions.they make very bad decisions.

Corporation CombinationsCorporation Combinations Horizontal mergerHorizontal merger –– join two or more firms competing in the same join two or more firms competing in the same

market with the same goodmarket with the same good Vertical mergerVertical merger –– join two or more firms involved in different stages of join two or more firms involved in different stages of

producing the same good or serviceproducing the same good or service ConglomeratesConglomerates --merging more than three businesses that produce merging more than three businesses that produce

unrelated products and servicesunrelated products and services•• Examples include Coca Cola, Time Warner, Walt DisneyExamples include Coca Cola, Time Warner, Walt Disney

Horizontal Merger Horizontal Merger

Combined Oil Company

Independent Oil Refiners

Vertical MergerVertical Merger

Combined Steel CompanySteel Mills

Coke fields

Ships

Ore deposits

Railroads

Multinational CorporationsMultinational Corporations Large corporation that produces and sells in more than one Large corporation that produces and sells in more than one

countrycountry These are the worldThese are the world’’s largest!s largest! Headquarters in one country and branches in the other. They Headquarters in one country and branches in the other. They

must obey laws and pay taxes in each country where they must obey laws and pay taxes in each country where they operate.operate.

•Early 2000’s, an estimated 64,000 multinational firms operated 866,000 foreign branches.

•These affiliates provide jobs to 53 million people!

•The United States, Great Britain, Germany, Japan, France, China are the one’s with the largest amounts!

Advantages of MultinationalAdvantages of Multinational Provides products and job around the worldProvides products and job around the world --benefits consumers benefits consumers

and workersand workers Helps poorer nationHelps poorer nation –– enjoy better living standardsenjoy better living standards Spreads new technology and production methodsSpreads new technology and production methods –– across the across the

globeglobe

Disadvantages of Multinational Disadvantages of Multinational Poor jobsPoor jobs-- unduly influence the culture and politicsunduly influence the culture and politics low wageslow wages –– high demand for workershigh demand for workers poor working conditionspoor working conditions -- not treated fairly (just like laborers in not treated fairly (just like laborers in

the U.S. in the late 1800s)the U.S. in the late 1800s)

4. Nonprofit Organizations4. Nonprofit Organizations An institution that functions much like a business, but does An institution that functions much like a business, but does

not operate for the purpose of generating profitnot operate for the purpose of generating profit Professional organizations Professional organizations --works to improve image, working works to improve image, working

conditions, and skill levelsconditions, and skill levels Business association Business association -- promote the collective business promote the collective business

interests of an areainterests of an area Trade association Trade association –– promotes interests of particular promotes interests of particular

industryindustry Labor union Labor union –– aim is to improve working conditionsaim is to improve working conditions

Examples include museums, public schools, the American Red Cross, hospitals, adoption agencies, churches, synagogues, YMCA’s (MOST provide service, not a good)!

AmericaAmerica’’s first Cooperatives first Cooperative Ben Franklin, one of our nationBen Franklin, one of our nation’’s s

founders, was a remarkable innovator. In founders, was a remarkable innovator. In 1752, he formed a company that 1752, he formed a company that collected money from its members in collected money from its members in order to make payments to any one of order to make payments to any one of them who suffered losses from a fire.them who suffered losses from a fire.

He wrote, He wrote, ““I would leave this to the I would leave this to the Consideration of all who are Consideration of all who are concernconcern’’ddfor their own or their for their own or their NeighbourNeighbour’’ssTemporal Happiness; and I am humbly of Temporal Happiness; and I am humbly of Opinion, that the Country is ripe for Opinion, that the Country is ripe for many such many such Friendly SocietiesFriendly Societies, whereby , whereby every Man might help another, without every Man might help another, without any Disservice to himself.any Disservice to himself.””

The NewThe New--England England Courant, August 13, 1722Courant, August 13, 1722

CooperativesCooperatives A business organization owned and operated by a group of A business organization owned and operated by a group of

individuals for their shared benefitindividuals for their shared benefit Consumer CooperativeConsumer Cooperative –– retail owned and sell items at a low priceretail owned and sell items at a low price Service CooperativeService Cooperative –– provides a service not a goodprovides a service not a good Producer CooperativeProducer Cooperative –– agricultural marketing which helps sell agricultural marketing which helps sell

productproduct (farming and energy to healthcare and childcare)(farming and energy to healthcare and childcare)

Voluntary and open membership

Control of the organization by its members

Sharing of contributions and benefits by members

Business OrganizationsBusiness Organizations

Difficult start upDifficult start upDouble taxationDouble taxationLoss of controlLoss of controlMore regulationMore regulation

Potential for GrowthPotential for GrowthAbility to raise capitalAbility to raise capitalLong lifespanLong lifespanAbility to hire specialistsAbility to hire specialists

Corporation Corporation

High fees/royaltiesHigh fees/royaltiesStrict operating Strict operating standardsstandardsPurchasing restrictionsPurchasing restrictionsLimited Product lineLimited Product line

BuiltBuilt--in Reputationin ReputationManagement TrainingManagement TrainingPaid national advertisingPaid national advertisingFinancial AssistanceFinancial AssistanceCentralized buying powerCentralized buying power

Business FranchiseBusiness Franchise

Unlimited liability Unlimited liability Lack of Control Lack of Control Potential for conflictPotential for conflictLack of Permanence Lack of Permanence

Ease of start upEase of start upShared decision makingShared decision makingMore capitalMore capitalAttractive to employeesAttractive to employees

PartnershipsPartnerships

Unlimited Personal Unlimited Personal LiabilityLiabilityLimited Access to Limited Access to ResourcesResourcesLack of PermanenceLack of Permanence

Ease of start upEase of start upFewer RegulationsFewer RegulationsSole receiver of profitSole receiver of profitFull Control Full Control Easy to discontinueEasy to discontinue

Sole ProprietorshipsSole Proprietorships

DISADVANTAGESDISADVANTAGESADVANTAGESADVANTAGES