Chapter 8Business Organizations

Types of Organizations Business Organization –

establishment formed to carry on commercial enterprise

Three Types• Sole Proprietorship• Partnerships• Corporations

Sole Proprietorships

A business owned and managed by a single individual

Advantages of Sole Proprietorships Easy to Start-Up

• Very little paperwork and legal expense

• Minimal requirementsAuthorization – must obtain a business license

Site Permit – permission to use a building

Pick a business name

Advantages of Sole Proprietorships

Relatively Few Regulations• Sole proprietorships are the least regulated businesses

• Major regulation is the city zoning laws – city determines what areas will accommodate each kind of building

Advantages of Sole Proprietorships

Sole Receiver of Profit

Full Control Easy to

Discontinue

It’s all mine!

Disadvantages of Sole Proprietorships

Unlimited Personal Liability

Limited Access to Resources

Lack of Permanence

I’ve lost everything!

Partnerships

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

Three Kinds of Partnership

General Partnership – Equal share of responsibility and liability among partners• Usually doctors, lawyers, accountants

Three Kinds of Partnership

Limited Partnership – one partner has unlimited personal liability, others contribute money• Could be any kind of business

Three Kinds of Partnership

Limited Liability Partnership (LLP) – all partners are limited from personal liability• States must grant permission to be an LLP – usually for doctors, lawyers, and dentists

Advantages of Partnerships

Easy to Start• Articles of Partnership – legal agreement of how to share profits and losses

Advantages of Partnerships

Easy to Start• Without articles of partnership, the business falls under the Uniform Partnership Act

Advantages of Partnerships Shared Decision

Making and Specialization

Large Pool of Capital

Taxation – no special taxes on the business

Disadvantages of Partnerships

Unlimited Liability (except with an LLP)

Potential for Conflict

:-@! ;~[

Sen. Arlen Specter vs. Sen. Ted Kennedy

Corporations, Mergers, Multinationals

Large entity owned by individual stockholders who all share limited liability for the firm’s debts• Stock – also called shares – a portion of ownership in a corporation

Corporations Corporations

are a separate legal entity from the stockholders who own it – so they’re taxed twice!

Two Types of Corporations

Closely-Held Corporations – majority of stock is passed down through the family

Two Types of Corporations

Publicly Held Corporations – many shareholders buying stock on the open market

Corporate Structure

Elect

Advantages of Incorporation

Advantages to the investor:• Limited liability

• Shares are transferable

Advantages of Incorporation Advantages to the

corporation• Higher potential for growth

• Long lasting• Nearly unlimited capitalSelling bonds

Disadvantages of Incorporation Difficulty and

Expense of Start-Up

Double Taxation

Loss of Control High

Regulations

Combining Corporations - Mergers

Horizontal Mergers – join two or more firms competing in the same market

+

Combining Corporations - Mergers

Vertical Mergers – join two or more firms involved in different stages of producing the same good

+

Combining Corporations - Conglomerates

Firms that buy other companies that produce totally unrelated goods

Multinationals Corporations that operate in

more than one country at a time

They must pay taxes and obey the laws of each country they operate in

Many have bigger budgets than the country they are in

Business Franchises

Semi-independent business that pays fees to a parent company

Business Franchises

In return for the fees, the business gets exclusive rights to sell the parent company’s product in a certain area

Advantages of Opening a Franchise

Management Training Standardized Quality National Advertising Program

I’m the same everywhere!

Advantages of Opening a Franchise

Financial Assistance Centralized Buying Power –

the parent company buys in bulk to save everyone money

Disadvantages of Opening a Franchise

High Franchising Fees – parent company gets a share of the profit called a royalty

Strict Operating Standards

Disadvantages of Opening a Franchise

Purchasing Restrictions Limited Product Line

Cooperative Organizations

A business organization owned and operated by a group of individuals for their shared benefit

Three Kinds of Co-op’s

Consumer Cooperatives – sell merchandise to members at reduced prices• Often require members to work or pay a membership fee

Three Kinds of Co-op’s

Service Cooperatives – same as consumer co-op, but it provides a service

Producer Cooperatives – agricultural co-ops that help farmers sell their product

Nonprofit Organizations

Do not work for profit, but rather to help people

Exempt from income taxes

Nonprofit Organizations Professional Organizations –

improve the image, working condition, and skill level of people in a profession

Business Association – promote the business interests of a geographical area (like a city or a state)

Nonprofit Organizations

Trade Associations – promote the interest of an industry

Labor Unions – organized group of workers that aim to improve conditions, hours, and wages