Chapter 2: Business Chapter 2: Business OrganizationOrganization

Vocabulary(1)Vocabulary(1)

• ProprietorshipProprietorship– ownershipownership

• StockholderStockholder– One who owns stock in a companyOne who owns stock in a company

• PartnershipPartnership– Unregistered business where two or more people agree Unregistered business where two or more people agree

to share, not necessarily equally, in the risks and profits to share, not necessarily equally, in the risks and profits of the organizationof the organization

• EntityEntity– Something that has a real and separate existenceSomething that has a real and separate existence

• BankruptcyBankruptcy– State of being declared by a court of law not to be State of being declared by a court of law not to be

capable of paying its debtscapable of paying its debts

Vocabulary (2)Vocabulary (2)

• Joint-stock companyJoint-stock company– Public company whose shares are owned by very Public company whose shares are owned by very

many peoplemany people• DividendDividend

– Percentage of profits paid to shareholdersPercentage of profits paid to shareholders• BylawBylaw

– A law or rule governing the internal affairs of an A law or rule governing the internal affairs of an organizationorganization

• Treasurer---person who looks after the Treasurer---person who looks after the money or finance of a club or society;money or finance of a club or society;

• Comptroller---financial controller;Comptroller---financial controller;• Company limited---COCompany limited---CO ，， LTD (LTD (有限责任公司）有限责任公司）• Inc----Incorporated Corporation----CorpInc----Incorporated Corporation----Corp

1.Introduction 1.Introduction

• The majority of business The majority of business organizations are corporations, organizations are corporations, others are general partnerships, others are general partnerships, limited partnerships, and sole limited partnerships, and sole proprietorships. Less common are proprietorships. Less common are professional corporations, Joint-professional corporations, Joint-stock companies, business trust and stock companies, business trust and joint venture. joint venture.

2. Sole Proprietorship 2. Sole Proprietorship

• Advantage----the owner has Advantage----the owner has exclusive control over its operations.exclusive control over its operations.

• Disadvantage----firstly, the owner is Disadvantage----firstly, the owner is exposed to unlimited liability; exposed to unlimited liability; secondly, it is normally not in the secondly, it is normally not in the best position to raise large sums of best position to raise large sums of money; thirdly, its lack of continuity.money; thirdly, its lack of continuity.

3. General Partnership3. General Partnership

– Definition----it is an association of two or more Definition----it is an association of two or more persons to carry on, as co-owners, a business for persons to carry on, as co-owners, a business for profit. Unlike a corporation, it is not a legal entity. profit. Unlike a corporation, it is not a legal entity. All partners in a general partnership have unlimited All partners in a general partnership have unlimited liability; it has a voice in the management.liability; it has a voice in the management.

– Formation----it does not require a formal written Formation----it does not require a formal written agreement, nonetheless, it is desirable to have an agreement, nonetheless, it is desirable to have an agreement in writing, referred to as articles of agreement in writing, referred to as articles of partnership.partnership.

– Termination----be dissolved by act of the parties or Termination----be dissolved by act of the parties or by operational of law. Dissolution is not the by operational of law. Dissolution is not the complete end of partnership activity until the complete end of partnership activity until the partnership affairs are completed.partnership affairs are completed.

4. Limited Partnership 4. Limited Partnership

• Limited partnership----one or more partners in Limited partnership----one or more partners in the limited partnership have limited liability--the limited partnership have limited liability--their liability is limited to the extent of their their liability is limited to the extent of their investment in the partnership; it has no investment in the partnership; it has no control over the everyday management of the control over the everyday management of the partnership.partnership.

• It is usually formed for investment purpose It is usually formed for investment purpose because the partners enjoy tax advantages. because the partners enjoy tax advantages.

• Limited partnership involves passive investors Limited partnership involves passive investors who are like shareholders in a corporation.who are like shareholders in a corporation.

5. Joint Stock Company (rarely 5. Joint Stock Company (rarely seen) seen)

• It is an unincorporated business enterprise with It is an unincorporated business enterprise with the ownership interest represented by shares of the ownership interest represented by shares of stock. stock.

• These companies can be created with little These companies can be created with little formality. It does not require chartering formality. It does not require chartering requirements and initial capital outlay.requirements and initial capital outlay.

• Disadvantage----the shareholders are personally Disadvantage----the shareholders are personally liable for all the associationliable for all the association’’s obligations. s obligations. Conversely, they share the profits in proportion Conversely, they share the profits in proportion to their controlling interest in the company to their controlling interest in the company

6. Corporations (1)6. Corporations (1)

• Features of CorporationFeatures of Corporation– It is a separate legal entity for all purpose;It is a separate legal entity for all purpose;– It is not mortal, corporation has a perpetual It is not mortal, corporation has a perpetual

existence;existence;– The owners of the corporation, called The owners of the corporation, called

shareholders, enjoy limited liability;shareholders, enjoy limited liability;– It is the ease of transferring ownership interests;It is the ease of transferring ownership interests;– The separation of ownership from management;The separation of ownership from management;– It pays taxes on its earnings and stockholders It pays taxes on its earnings and stockholders

pay tax on those earningspay tax on those earnings ；； (undesirable)(undesirable)– The corporate form requires compliance with an The corporate form requires compliance with an

array of formalized procedure.array of formalized procedure.

6. Corporations (2)6. Corporations (2)

• Types of CorporationsTypes of Corporations– Public corporations are established by the Public corporations are established by the

government. For example, U.S postal service.government. For example, U.S postal service.– Quasi-public corporations are public service Quasi-public corporations are public service

companies, such as public utilities. (water, gas)companies, such as public utilities. (water, gas)– Private corporations are those established for Private corporations are those established for

private interests and include bulk of existing private interests and include bulk of existing corporations.corporations.

• Closely held corporation----owned by one or a few Closely held corporation----owned by one or a few shareholders. It does not publicly offer their stock (fund shareholders. It does not publicly offer their stock (fund company)company)

• Public held corporation----it has a number of unrelated Public held corporation----it has a number of unrelated shareholders. They do not actively manage the company. shareholders. They do not actively manage the company. The share of stock are traded freely on stock exchangeThe share of stock are traded freely on stock exchange

Public

Closely held

Nonprofit

Quasi public

Profit

Professional

Private

Publicly held

6. Corporations (3)6. Corporations (3)

• Corporate Management Corporate Management – Shareholders elect a board of directors Shareholders elect a board of directors

to manage the corporation. The board to manage the corporation. The board delegates the day to day operations to delegates the day to day operations to officers. officers.

6. Corporations (4)6. Corporations (4)

• ShareholdersShareholders– Common stockholders----it has voting rights Common stockholders----it has voting rights

whereas preferred stockholders normally can whereas preferred stockholders normally can vote only on extraordinary matters;vote only on extraordinary matters;

– Preferred stockholders----they are entitled to Preferred stockholders----they are entitled to received their dividends before common received their dividends before common stockholders. On dissolution, they are entitled stockholders. On dissolution, they are entitled to distribution of assets before common to distribution of assets before common stockholders.stockholders.

• DividendsDividends– Dividends are portions of corporate earnings Dividends are portions of corporate earnings

distributed to shareholders.distributed to shareholders.

Business Business OrganizationOrganizationss

OwnershiOwnershipp

ManagemeManagement Controlnt Control

Liability Liability ExposureExposure

DurationDuration Tax-Tax-paying paying EntityEntity

Sole-Sole-proprietorshiproprietorshipp

SelfSelf SelfSelf UnlimitedUnlimited LimitedLimited YesYes

PartnershipPartnership

(general/(general/

limited)limited)

PartnersPartners PartnersPartners Unlimited/Unlimited/

limitedlimitedLimitedLimited Yes/NoYes/No

CorporationCorporation ShareholShareholdersders

Board of Board of directors/directors/

officersofficers

LimitedLimited PerpetualPerpetual YesYes

7. Multinational corporation 7. Multinational corporation (MNC)(1)(MNC)(1)

• It is used to identify firms which have It is used to identify firms which have extensive involvement in international extensive involvement in international business. It engages in foreign direct business. It engages in foreign direct investment and owns or controls value-investment and owns or controls value-adding activities in more than one adding activities in more than one country.country.

• It can be generally be applied to most of It can be generally be applied to most of the worldthe world’’s larger, well-known s larger, well-known businesses.businesses.

7. . Multinational 7. . Multinational corporation (MNC)(2)corporation (MNC)(2)• Home replication corporation---in this approach, a firm Home replication corporation---in this approach, a firm

utilizes the core competency or firm-specific utilizes the core competency or firm-specific advantage it developed at home as its main advantage it developed at home as its main competitive weapon in the foreign markets that it competitive weapon in the foreign markets that it enters. (Mercedes Benz)enters. (Mercedes Benz)

• Multidomestic corporation---it views itself as a Multidomestic corporation---it views itself as a collection of relatively independent operating collection of relatively independent operating subsidiaries, each of which focuses on a specific subsidiaries, each of which focuses on a specific domestic market. In addition, each of these domestic market. In addition, each of these subsidiaries is free to customize its products, its subsidiaries is free to customize its products, its marketing campaigns, and its operations techniques marketing campaigns, and its operations techniques to best meet the needs of its local customers.to best meet the needs of its local customers.

7. . Multinational corporation 7. . Multinational corporation (MNC)(3)(MNC)(3)

----A global corporation views the world as a ----A global corporation views the world as a single marketplace and strives to create single marketplace and strives to create standardized goods and services which will standardized goods and services which will meet the need of customers worldwide meet the need of customers worldwide (Apple electronic stuff)(Apple electronic stuff)

----A transnational corporation seeks to ----A transnational corporation seeks to combine the benefits of global-scale combine the benefits of global-scale efficiencies with the benefits of local efficiencies with the benefits of local responsiveness. (IKEA) responsiveness. (IKEA)

11-11-1818

Figure 11.1 Strategic Figure 11.1 Strategic AlternativesAlternatives

Global StrategyFirm views the world assingle marketplace. Goal is to create standardizedproducts.

Home ReplicationFirm uses core competency or firm-specific advantage

Multidomestic StrategyFirm operates as a collection of relativelyindependent subsidiaries

Transnational StrategyFirm combines benefits of global scaleefficiencies with benefitsof local responsiveness

Low High

Pressures for Local Responsiveness/Flexibility

Pre

ssu

res

for

Glo

bal

Effi

cien

cies

High

Low

Comprehension questionsComprehension questions(Page 22)(Page 22)