CH. 9: Business CH. 9: Business OrganizationsOrganizations

1.1. Sole ProprietorshipsSole Proprietorships

2.2. PartnershipsPartnerships

3.3. Corporations and FranchisesCorporations and Franchises

ENTREPRENEUR:ENTREPRENEUR:

• Person willing to take the risk and start a business

SOLE PROPRIETORSHIPSOLE PROPRIETORSHIP

• Owned and controlled by a single individual : “Proprietor” = OWNER of PROPERTY

• Most basic type

• Most common– Only 5% of sales– But 70% of businesses

• Most small, local businesses

ADVANTAGES of SOLEADVANTAGES of SOLEPROPRIETORSHIPPROPRIETORSHIP

• Less complicated (easy to form / dissolve)• Easy decision-making (owner “calls the shots”)• Direct communication with employees• Fewer government regulations• Owner gets all the profits & pride (high incentive)

--makes all decisions --quick

• NO DOUBLE TAXATION: Personal income taxes often lower than corp. taxes

• Lenders are more willing to extend credit because of UNLIMITED LIABILITY of sole owner

KEY TERMS:KEY TERMS:

• ASSETS: What you OWN!

• LIABILITIES: What you OWE!

DISADVANTAGES of SOLEDISADVANTAGES of SOLEPROPRIETORSHIPPROPRIETORSHIP

• Borrowing large amounts = harder because of limited assets• Small budget limits variety and diversity of products

• UNLIMITED LIABILITY • complete legal responsibility for all debts and damages• lose house, car, savings, etc., as well as business (personal as well as

business ASSETS) …THUS, HIGH INSURANCE COSTS!

• Owner has to make all the decisions even in areas which are out of his expertise

• Demanding & time consuming• Business closes if owner dies, goes bankrupt, or is

unwilling or unable to work

PARTNERSHIPPARTNERSHIP

• A business that two or more individuals own and operate

• Account for – 5% of annual sales– 15% of businesses

ADVANTAGES of ADVANTAGES of PARTNERSHIPSPARTNERSHIPS

• More human & financial resources– Greater efficiency with each partner working in his

area of expertise– Combines CAPITAL of two or more, thus, makes

more $ available to operate a larger business– Creditors may be willing to lend more money because

risk is shared• PRIDE in ownership: all profit & pride belongs to

the FEW partners (high incentive)• Losses are shared• NO DOUBLE TAXATION: Personal income

taxes may be lower than corporate taxes

DISADVANTAGES of DISADVANTAGES of PARTNERSHIPSPARTNERSHIPS

• More difficult to form & dissolve• Communication between owners & employees isn’t as direct• Slower decision making (consensus); disagreements lead to

problems• Borrowing large amounts = harder because of limited assets• Must SHARE PROFITS • UNLIMITED LIABILITY (responsible if partner can’t pay and

responsible for partners’ acts!)--complete legal responsibility for all debts and damages--lose house, car, savings, etc., as well as business (personal as well as business ASSETS)

• Business closes if one partner dies, leaves, or is unwilling or unable to work (uncertainty = risk for creditor)

LIMITED PARTNERSHIPLIMITED PARTNERSHIP

• Special form of partnership• GENERAL PARTNER:

--manages firm

--has full responsibility for firm’s debt

• LIMITED PARTNER:--supplies money or property

--has no voice in management

• Certificate of Partnership: (minimum info) co. name, nature of business, principal place of business, names and addresses of each partner, how long partnership will last, amount contributed by each partner

JOINT VENTUREJOINT VENTURE

• A temporary partnership

• Set up for a specific purpose

• For a short period of time

CORPORATIONCORPORATION• An organization owned by stockholders• Account for

– 90% of all sales (large economic impact!)

– 15% of businesses (relatively few)

• Treated as a PERSON under the LAW (a separate legal entity; it can

– Own property– Pay taxes– Make contracts– Sue and be sued

ADVANTAGES of ADVANTAGES of CORPORATIONSCORPORATIONS

• Access to the most financial resources due to sale of STOCKS & BONDS, thus can develop diversified product line

• LIMITED LIABILITY: The corp., not its stockholders, is responsible for its debts. Creditors cannot take stockholders’ personal property; stockholder can lose only what he’s got in the stock

• MANAGEMENT = divided among trained personnel; allows for large & complex operations

• PRIDE in ownership of stock• FINANCING GROWTH: issue stock to raise CAPITAL• PERPETUAL EXISTENCE: Corp. can continue as long as

profitable; not affected by death of stockholders

DISADVANTAGES of DISADVANTAGES of CORPORATIONSCORPORATIONS

• DECISION MAKING can be slow and complicated (Board of Directors must vote)

• PRINCIPAL-AGENT PROBLEM: management’s interests and the STOCKHOLDERS’ interests aren’t always the same

• PROFIT IS DOUBLE TAXED:– CORPORATE PROFIT TAX: Federal gov’t and some

state & local govt’s tax corporate profits; CORP. “INCOME TAX”

– Profits paid to stockholders as DIVIDENDS are taxes again as income

• Some states tax CORPORATE PROPERTY• Owners (STOCKHOLDERS) have little say in how the

corporation is run

ARTICLES of INCORPORTATIONARTICLES of INCORPORTATION

• Filed with STATE in order to obtain a CORPORATE CHARTER (a license to

operate from that state)• Includes:

– Name, address, & purpose of corp.– Names & addresses of bd. of directors– Number of shares of stock to be issued– Amount of money capital to be raised through

issuing stock

FRANCHISEFRANCHISE

• A contract in which a FRANCHISOR sells to another business (FRANCHISEE) the right to

--use its name (and advertising)

--sell its products

--use its business model & methods or training program

• FRANCHISEE pays fee which may include a percentage of all $$$ taken in

• EX.: McDonalds & McAllister’s Deli

MERGERSMERGERS

• Occur when 2 or more businesses unite under the same ownership

• One can buy the other or they can simply combine

• 3 categories:– HORIZONTAL MERGERS– VERTICAL MERGERS– CONGLOMERATE MERGERS

3 Categories of MERGERS:3 Categories of MERGERS:• HORIZONTAL MERGER:

– 2 companies at the same stage of production join; eliminates competition

– McDonalds & Burger King– VERTICAL MERGER: – 2 companies at different stages of production of the

same product merge– McDonalds and a meat processing company

• CONGLOMERATE MERGER– 2 totally UNRELATED companies merge

Celler-Kefauver ActCeller-Kefauver Act

• 1950

• Prohibits any type of merger that gives merging firms an unfair advantage in the marketplace (MONOPOLY)

INFO. on STOCKSINFO. on STOCKS

• Types

• Benefits and risks

• Primary and Secondary Markets

COMING SOON !!! We’ll cover these when we talk about FINANCING A BUSINESS!