MB 03 Formation&Classificationoforganisations

8/2/2019 MB 03 Formation&Classificationoforganisations

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Lecture 3 - Formation and Classification of

Organisations

Managing Business
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Managing Business (ABUS002-3-1) Formation and Classification of Organisations

Learning Outcomes

At the end of the lecture, you should be able to:

Identify the basic forms of organization.

Explain the advantages and disadvantagesof each type of business ownership

Understand the impact of the form of

business ownership on risk
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Business Ownership Decisions

Advantages and disadvantages of eachtype of business ownership

Impact of the form of business ownershipon return on investment

Impact of the form of business ownership

on risk Methods to obtain ownership of existing

businesses
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Forms of Business Ownership

Sole Proprietorship Owned by a single owner.

Partnership

Co-owned by two or more people. Co-owners must register with the state and

may need an occupational license.

Corporation State chartered entity that pays taxes and is

legally distinct from its owners.
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Sole Proprietors

Must be willing to accept full responsibilityfor firm performance

Business profits are not shared withcreditors

Need strong leadership skills, must be well

organized, and communicate well withemployees
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Sole Proprietorship

Advantages

All earnings go tothe sole proprietor

Easy organization

Complete control

Lower taxes

Disadvantages

Sole proprietorincurs all losses

Unlimited liability

Limited funds

Limited skills
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Types of Partnerships

General Partnerships All partners have unlimited liability.

Limited Partnerships

Some partners have personal liability that is limited tothe cash or property they invested in the firm.

One or more general partners who actively managethe business, receive a salary, share in profits andlosses, have unlimited liability.

Personal earnings received from the partnership aresubject to personal income taxes.
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Partnerships

Advantages

Additional funding

Losses are shared More specialization

Disadvantages

Control is shared

Unlimited liability forgeneral partners

Profits are shared
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Other Business Forms

S Corporation

Firm has 75 or fewer employees.

Owners have limited liability, but are taxed asif the firm were a partnership.

Limited Liability Corporation (LLC)

Has all the favorable features of a generalpartnership but also offers limited liability forthe partners.
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Corporations

Individual or group must adopt corporatecharter and file it with the state Describes name of the firm, stock issued,

firms operations Must also establish bylaws

Shareholders have limited liability

Shareholders elect members of board ofdirectors
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Stockholders

Elect members of board of directors whoare responsible for establishing generalpolicies of the firm

Elect president and other key officers who runthe business

Earn return on investment in two ways

May receive dividends

Stock may increase in value
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Corporations

Advantages

Limited liability

Access to funds Transfer of

ownership

Disadvantages

High organizationalexpense

Financial disclosure

Agency problems

High taxes
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Private vs. Public

Ownership of privately held corporations isrestricted to a small group of investors.

Publicly held shares can be easilypurchased or sold by investors.

Act of initially selling stock is called going

public.

Publicly held corporations obtain additionalfunds by issuing new common stock.
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Joint Venture

A joint venture is an agreement betweentwo or more parties to contribute a part oftheir resources (assets and/or expertise) toa specific project.

A joint venture involves:

A high level of commitment, funds, time

A degree of risk

A management voice for both parties Equity participation by each partner
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Joint Venture

Advantages

Better returns

Greater controlover productionand marketing

Direct identity

Pooling of eachpartners strengths

Disadvantages

High capital cost

Time consuming Cultural differences

Political risks
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Summary of Main Teaching Points

Explain how business owners select a form ofownership.

Understand how the potential return and riskof a business are affected by its form ofownership.

Describe the impact of the form of businessownership on return on investment.
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Q & A

Question and Answer Session
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18/18Managing Business (ABUS002 3 1) Formation and Classification of Organisations

Topic and Structure of next session

Next Session

NEXT LESSON:

Organisation Structure and

Concepts
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MB 03 Formation&Classificationoforganisations