Chapter 8

Business Organizations

FORMS OF BUSINESS ORGANIZATIONS:

1. Sole Proprietorship2. Partnership3. Corporation

Section 1

Sole Proprietorships

A sole proprietorship is a form of business organization in which the business firm isowned and managed by a single individual who: makes all business decisions receives all profits earned is responsible for any losses incurred by the firm

SOLE PROPRIETORSHIP

75 % of American businesses

However, they only generate about 6% of the total sales in the country

Ex. barber, bakery, bike shop

Advantages and Disadvantages:

+PROS CONSeasy start-up

owner gets all profitsproprietor is their own boss

unlimited liability*

limited ability to raise funds

less likely to get a bank loan

limited lifelack of fringe benefits**

few regulations ex. zoning laws** and health codes

easy to discontinue (shut down)**Fringe benefit: payment other than money Ex. Health insurance/paid vacation

*Liability: the legally bound obligation to pay debts

Authorization/business license*Site permit (C/O)Business name

*business license: authorization from local gov't**zoning laws: laws in a city or town that designates

separate areas for residency and for business

Section 2

Partnerships

Partnershipsform of business ownership that is owned by two or more people

partners share profits, losses and decision-making

least common type of business in the U.S.

some use a partnership agreement (aka: articles of partnership)

Types of Partnerships

General Partnership

Limited Partnership

Limited Liability Partnership (LLP)

responsibility/liability is shared equally among partners

only ONE partner required to have unlimited liabilitygeneral partner controls the business, others give $

all partners are limited partners -> protected against each other's mistakes

+PROS CONS

easy (and relatively inexpensive) to start up

shared decision making

specialization in management

better fund-raising ability (useof each partners assets*)

limited life (job lasts only as long as the partnership)

unlimited liability

(asset: money or other valuables belonging to an individual or business)

potential conflict

(except for LLP)

Section Three:

Corporations, Mergers and Multinationals

Corporation: a legal entity owned by individual stockholders

ex. super markets, big box stores

Corporations

20% of all U.S. business

but do 90% of the sales

Generate 70% of net income in the U.S.

Their profit is usually about 10% of their income

Two Types of Corporations:

Closely held corporations/Privately held corporations1. few people are stockholders (usually family

members)

Publicly held corporations1. stock is bought and stock on the open market /

stock exchanges2. they are usually run by a Board of Directors 3. Board of Directors makes all of the major decisions

and they appoint corporate officers

Advantages and Disadvantages:

+PROS CONS

less likely to get a bank loan

* limited liability - stockholders can only lose the amount they paid for the stock

* transferable ownership

* easy to gain capital - through bonds: a formal contract to repay borrowed money with interest at

fixed intervals or through further stock sales.

*long life

* high start- up costs / difficult process / certificate of incorporation: license from state

* double taxation - corporation income and stockholders must pay taxes on their dividends (portion of profits paid to stockholders)

*more legal requirements and regulations

Mergers / Corporate Combinations

1. Horizontal Merger: Combining two or more firms in the same marketExample: Chrysler and Daimler - Benz

2. Vertical Merger: Combining two or more firms in different stages of producing the same good or service

Example: iron producers and railroads

3. Conglomerates: Combining three or more firms that make unrelated products

Example: cereal maker and toothpaste and razors

Multinational Corporation (MNC)A firm which sells its goods and services througout the world or at least in more than one nation.

Example: Wal- Mart

In the 1990s there were:63,000 MNCs,

690,000 branches, $3 trillion in assets

Advantages and Disadvantages:

+PROS CONS

less likely to get a bank loan

* provide jobs and products around the world

* spread technology

* help poorer nations

* influence culture / politics

*often times take advantage of the poor

Section Four:

Other Organizations

Franchise

Semi- independent business that pays fees to a parent company.

The business receives exclusive rights to sell a good or service in a given area.

Example: Curves and McDonald's

Advantages and Disadvantages:

+PROS CONS

less likely to get a bank loan

* training and support

* standardized quality

* advertising

*financial assistance

* centralized buying power

* owner sacrifices freedom

* franchise fees / royalties: share of earnings paid to the franchiser

* strict operating standards

* purchasing restrictions

*limited product line

Cooperative Organizations / Co- ops

A business organization owned by a group of individuals for a shared benefit.

There are three types:1. Consumer Co-op: operated by consumers so they

can get products cheaper

Example: CD or DVD club 2. Service Co-op: offer services rather than products

Example: credit union or health care3. Producer Co-op: agricultural marketing co-op

that helps members sell their products

Non Profit Organizations

Similar to a business organization but they do not operate to generate profit.

Usually benefit societyExample: Museum, Red Cross

Pay no income taxes

Four Types of Non Profit Organizations

1. Professional Organization: A non profit organization that works to improve the image, working conditions and skill level of people in a particular occupation.

Example: ADA, ABA

2. Business Association: Promotes collective business interest for a certain area.

Example: BBB, Chamber of Commerce

3. Trade Association: Promotes interest of a particular industryExample: corn growers (high fructose corn syrup commericals)

4. Labor Unions: Promotes better working conditions, hours, wages, and benefits