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Types of Business Organizations

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The Characteristics of Sole ProprietorshipsKEY CONCEPTS

• Business organizations—produce goods, provide services– purpose of most is to earn profit – supply most products in market economy; provide jobs, income;

pay taxes• Sole proprietorship—owned and managed by single person

– Make up 70 percent of U.S. businesses, but generate only 5 percent of all sales

Sole Proprietorships

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Sole Proprietorships: Advantages and DisadvantagesAdvantages: Sole Proprietorships

• Easy to open or close as long as owner settles all bills• Must meet few regulations; possibly zoning, labor laws for employees• Owner makes own decisions, controls business; personal satisfaction• Owner keeps all profits

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Sole Proprietorships: Advantages and DisadvantagesDisadvantages: Sole Proprietorships

• Have limited funds, especially at start-up• Have limited life —close if owner dies, retire, or leaves business • Have unlimited liability—owner personally responsible for all debts• Hard to attract qualified employees

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Mary Kay Ash: Going It Alone

Building a Business• Ash decided to create business that would reward working women• Mary Kay, Inc. sells cosmetics, other products at in-home parties• In first year, 1964, sales exceeded $198,000• Incentives to consultants include pink Cadillacs, diamond jewelry• In 2005, 1.6 million consultants in 30 countries had $2 billion sales

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The Characteristics of Partnerships• Partnership—business co-owned by two or more people

– partners agree on division of responsibilities, profits, and losses • Found in all areas of business

– very common in professional and financial services

Forms of Partnerships

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The Characteristics of Partnerships

Type 1: General Partnerships • General partnership—most common type • Partners share responsibilities, profits, debts, losses equally

– partnership agreement can specify otherwise

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The Characteristics of Partnerships

Type 2: Limited Partnerships • Limited partnership—at least one limited partner

– not involved in running business – liable only for funds he or she invested

• Must have general partner who runs business, is liable for all debts– money for business comes from limited partners

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The Characteristics of Partnerships

Type 3: Limited Liability Partnerships• Limited liability partnership (LLP)—all partners are limited

– not responsible for liabilities of other partners• Not all businesses can register as LLPs

– only those in which malpractice can be an issue

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Partnerships: Advantages and Disadvantages

Advantages: Partnerships• Easy to start up and dissolve• Few regulations: legal agreement; Uniform Partnership Act (UPA)• More funds means easier to get loans, attract employees• Joint decision making: partners bring different perspectives• Partners can specialize, promoting efficiency

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Partnerships: Advantages and Disadvantages

Disadvantages: Partnerships• Unlimited liability

– partners risk personal savings and property to cover debts• Potential for conflict if many partners must agree on decisions• Limited life—if partner leaves or joins new agreement must be drawn

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Characteristics of Corporations

• Corporation—business owned by stockholders (many owners) • Stock—shares of ownership in a corporation • Dividend—part of a corporation’s profit paid out to stockholders • Public company—issues stock that can be freely bought and sold • Private company—controls who can buy or sell its stock• Bond—contract issued by corporation

– promises to repay borrowed money, plus interest on fixed schedule

Corporations, Mergers, and Multinationals

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Corporations: Advantages and Disadvantages

Advantages• Can raise money in various ways:

– borrowing from banks, selling more stock, issuing bonds• Professional managers likely to produce higher profits• Limited liability—stockholders, directors, officers protected • Unlimited life—business operates as before if stockholders change

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Corporations: Advantages and Disadvantages

Disadvantages• Starting up: time-consuming, difficult, expensive; paperwork, lawyers• Heavy regulation, specially for public companies

– annual SEC reports, quarterly financial reports, stockholder meetings

• Both profits and dividends taxed; some small corporations excluded• Decisions made by board; founders must give up some control

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Business Consolidation

KEY CONCEPTS• To increase efficiency, gain new identity, keep rivals out, diversify• Horizontal merger—joins companies with same or similar product • Vertical merger—joins different steps of production, marketing• Conglomerate—combines 4+ companies with unrelated products• Multinational corporation—has branches in several countries

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Business Consolidation

Mergers• In 2005, Reebok and Adidas made horizontal merger

– meant to cut production, distribution costs by combining operations

– purpose to undersell and take customers from Nike• In 1990s, Shell and Texaco made vertical merger

– Shell had more refineries; Texaco more gas stations for distribution

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Business Consolidation

Conglomerates• Theory: diversified businesses protect parent company • Practice: difficult to manage unrelated companies• 1960s Gulf and Western in communications, clothes, mines, food

– eventually sold all except entertainment, publishing; became Viacom

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Business Consolidation

Multinational Corporations• Multinational, or transnational, corporations increase globalization• Benefits: provide jobs, products; spread technology; pay taxes

– help raise standard of living of poor countries• In countries with lax regulations, factories may cause problems

– pollution, long work hours, unsafe conditions

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Bill Gates: Entrepreneur and Corporate LeaderMicrosoft Corporation

• With Paul Allen, developed BASIC language for personal computers• In 1975, they founded Microsoft to provide software for early PCs• Microsoft began providing operating system for IBM PCs • In 1985, released Windows, which became world’s most popular

operating system• In 1994, Gates founded charitable foundation for health, education

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Franchises• Franchise—business that licenses the right to sell its products • Franchisee—pays fee to parent company to sell in a particular area • Fast-food restaurants are most common type of franchise

Franchises, Co-ops, and Nonprofits

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Franchises

Advantages: Franchises • High level of independence• Franchiser provides training in running the business• Franchiser provides products and other materials at low cost• Franchiser pays for national and regional advertising

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Franchises

Disadvantages: Franchises• Franchisee must invest own money to start business• Must share some of the profits with franchiser• Does not have full control of business

– must buy only franchiser’s materials– must sell only franchiser’s products

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Top 50 Franchises for 2011

http://www.entrepreneur.com/franchises/rankings/franchise500-115608/2011,-1.html

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Cooperatives and Nonprofits

• Some businesses are not created to make a profit• Cooperative—operated for shared benefit of owners, who are

customers• Nonprofit organization—acts like business but purpose is to benefit

society Examples: schools, churches, Goodwill, etc.

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Cooperatives and Nonprofits

A Business Organization for Its Members• Consumer co-ops keep prices low by purchasing in large volume

– members pay fee or provide labor as payment• Service co-ops, such as credit unions, provide services at low cost• Producer co-ops ensure cheaper, more efficient processing or

marketing

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Cooperatives and Nonprofits

Nonprofits• Purpose of many nonprofits is benefiting society

– include charities, professional associations, labor unions, museums

• Receive government charter; have unlimited life• Raise money from donations, grants, membership fees

– some sell services, products to raise funds to support their mission• Other nonprofits are professional organizations

– include professional associations, labor unions