Chapter 8Chapter 8

Business OrganizationsBusiness Organizations

Types of OrganizationsTypes of Organizations Business Organization – Business Organization –

establishment formed to establishment formed to carry on commercial carry on commercial enterpriseenterprise

Three TypesThree Types•Sole ProprietorshipSole Proprietorship•PartnershipsPartnerships•CorporationsCorporations

Sole ProprietorshipsSole Proprietorships

A business owned and A business owned and managed by a single managed by a single individualindividual

Advantages of Sole ProprietorshipsAdvantages of Sole Proprietorships Easy to Start-UpEasy to Start-Up

•Very little paperwork and legal Very little paperwork and legal expenseexpense

•Minimal requirementsMinimal requirementsAuthorization – must obtain a Authorization – must obtain a business licensebusiness license

Site Permit – permission to Site Permit – permission to use a buildinguse a building

Pick a business namePick a business name

Advantages of Sole ProprietorshipsAdvantages of Sole Proprietorships

Relatively Few RegulationsRelatively Few Regulations•Sole proprietorships are the Sole proprietorships are the least regulated businessesleast regulated businesses

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

Advantages of Sole ProprietorshipsAdvantages of Sole Proprietorships

Sole Receiver Sole Receiver of Profitof Profit

Full ControlFull Control Easy to Easy to

DiscontinueDiscontinue

It’s all mine!

Disadvantages of Sole Disadvantages of Sole ProprietorshipsProprietorships

Unlimited Unlimited Personal LiabilityPersonal Liability

Limited Access Limited Access to Resourcesto Resources

Lack of Lack of PermanencePermanence

I’ve lost everything!

PartnershipsPartnerships

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

Three Kinds of PartnershipThree Kinds of Partnership

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

Three Kinds of PartnershipThree Kinds of Partnership

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

Three Kinds of PartnershipThree Kinds of Partnership

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

Advantages of PartnershipsAdvantages of Partnerships

Easy to StartEasy to Start•Articles of Articles of

Partnership – Partnership – legal agreement legal agreement of how to share of how to share profits and lossesprofits and losses

Advantages of PartnershipsAdvantages of Partnerships

Easy to StartEasy to Start•Without articles Without articles

of partnership, of partnership, the business falls the business falls under the under the Uniform Uniform Partnership ActPartnership Act

Advantages of PartnershipsAdvantages of Partnerships

Shared Decision Shared Decision Making and Making and SpecializationSpecialization

Large Pool of Large Pool of CapitalCapital

Taxation – no Taxation – no special taxes on special taxes on the businessthe business

Disadvantages of PartnershipsDisadvantages of Partnerships

Unlimited Unlimited Liability Liability (except with (except with an LLP)an LLP)

Potential for Potential for ConflictConflict

:-@! ;~[

Sen. Arlen Specter vs. Sen. Arlen Specter vs.

Sen. Ted KennedySen. Ted Kennedy

Corporations, Mergers, Corporations, Mergers, MultinationalsMultinationals

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

CorporationsCorporations

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

Two Types of CorporationsTwo Types of Corporations

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

Two Types of CorporationsTwo Types of Corporations

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

Corporate StructureCorporate Structure

Stockholders

Board of Directors

CEO COO

Managers

Other Employees

Elect

Advantages of IncorporationAdvantages of Incorporation

Advantages to Advantages to the investor:the investor:•Limited Limited liabilityliability

•Shares are Shares are transferabletransferable

Advantages of IncorporationAdvantages of Incorporation Advantages to the Advantages to the

corporationcorporation•Higher potential Higher potential

for growthfor growth•Long lastingLong lasting•Nearly unlimited Nearly unlimited

capitalcapitalSelling bondsSelling bonds

Disadvantages of IncorporationDisadvantages of Incorporation Difficulty and Difficulty and

Expense of Expense of Start-UpStart-Up

Double Double TaxationTaxation

Loss of ControlLoss of Control High High

RegulationsRegulations

Combining Corporations - MergersCombining Corporations - Mergers

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

+

Combining Corporations - MergersCombining Corporations - Mergers

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

+

Combining Corporations - Combining Corporations - ConglomeratesConglomerates

Firms that buy other Firms that buy other companies that produce companies that produce totally unrelated goodstotally unrelated goods

GE

GE Insurance NBC GE Plastics

MultinationalsMultinationals Corporations that operate in Corporations that operate in

more than one country at a more than one country at a timetime

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

Many have bigger budgets Many have bigger budgets than the country they are inthan the country they are in

Business FranchisesBusiness Franchises

Semi-Semi-independent independent business that business that pays fees to pays fees to a parent a parent companycompany

Business FranchisesBusiness Franchises

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

Advantages of Opening a Advantages of Opening a FranchiseFranchise

Management TrainingManagement Training Standardized QualityStandardized Quality National Advertising ProgramNational Advertising Program

I’m the same everywhere!

Advantages of Opening a Advantages of Opening a FranchiseFranchise

Financial AssistanceFinancial Assistance Centralized Buying Power – Centralized Buying Power –

the parent company buys in the parent company buys in bulk to save everyone moneybulk to save everyone money

Disadvantages of Opening a Disadvantages of Opening a FranchiseFranchise

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

Strict Operating StandardsStrict Operating Standards

Disadvantages of Opening a Disadvantages of Opening a FranchiseFranchise

Purchasing RestrictionsPurchasing Restrictions Limited Product LineLimited Product Line

Cooperative OrganizationsCooperative Organizations

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

Three Kinds of Co-op’sThree Kinds of Co-op’s

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

Three Kinds of Co-op’sThree Kinds of Co-op’s

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

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

Nonprofit OrganizationsNonprofit Organizations

Do not work for profit, but Do not work for profit, but rather to help peoplerather to help people

Exempt from income taxesExempt from income taxes

Nonprofit OrganizationsNonprofit Organizations

Professional Organizations – Professional Organizations – improve the image, working improve the image, working condition, and skill level of condition, and skill level of people in a professionpeople in a profession

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

Nonprofit OrganizationsNonprofit Organizations

Trade Associations – promote Trade Associations – promote the interest of an industrythe interest of an industry

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