Business Organizations

• Sole Proprietorship

• Partnership

• Corporation

Sole Proprietorship

• Business owned and run by one person/family

Sole Proprietorship

• Advantages:1. Ease of

starting up

2. Ease of managing

3. Keep all the profits

Sole Proprietorship

• Advantages:4. No “business

income taxes” to pay- Not a separate

legal entity

Sole Proprietorship

• Advantages:5. Personal

satisfaction

- you are your own boss

Sole Proprietorship

• Advantages:6. Easy to get out

of business- Pay up debts and

stop offering goods or services

Sole Proprietorship

• Disadvantages:1. Personal

unlimited liability- Responsible for all

losses and debts

Sole Proprietorship

• Disadvantages:2. Hard to raise

financial capital (money needed to start the business)- May have to use

savings, credit cards, borrow from banks or friends/family

Sole Proprietorship

• Disadvantages:3. Size and

Efficiency- Need to hire

enough people and stock enough inventory to be successful

Inventory – stock of goods and parts in reserve

Sole Proprietorship

• Disadvantages:4. Limited

managerial experience- May need to hire

people for that role

Sole Proprietorship

• Disadvantages:5. Hard to attract

qualified employees- Usually can’t offer

benefits available with large companies

Sole Proprietorship

• Disadvantages:6. Limited Life

- Ends with failure, death, or when the business is sold

Partnerships

• Business that is jointly owned by two or more persons

Partnerships – Two Kinds

• General Partnership – all partners are responsible for management and finances of the business

I sure hope he knows what he’s doing

I sure hope he knows what he’s doing

Partnerships – Two Kinds

• Limited Partnership – at least one partner is not responsible for daily running of business

Partnerships - Formation

• Articles of Partnership -– Filed with the state– Explain how profits

are divided up– Explain how new

partners can join

Partnerships

Advantages -1. Ease of

establishment• Attorney fees• Filing fees

Partnerships

Advantages -2. Ease of

Management

Partnerships

Advantages -3. No special income

tax to pay

Partnerships

Advantages -4. Easier to obtain

financing and capital• From banks• From new (rich)

partners

Partnerships

Advantages -5. Larger size = more

efficient operations

Partnerships

Advantages -6. Can attract top

talent to work

Partnerships

Disadvantages -1. Each partner is

fully responsible for actions of all the partners

Limited Liability – a partner’s liability is limited to the amount he/she has invested in the business

Partnerships

Disadvantages -2. Limited life –

partnership ends if a partner dies or leaves

Partnerships

Disadvantages -3. Potential conflict

between partners

Partnerships

Disadvantages -4. If the business

fails, partners may have to file for bankruptcy

Bankruptcy – permission granted by the court to stop or delay making payments on debt

Business Organizations Project

• In groups of 4, create a new business to manufacture and sell a unique product

• Must include:– Model of the product– Brochure to sell the product– Commercial to market the product– Description of the business organization

(Major Grade)

Corporations

A business recognized as a separate legal entity with all the rights of an individual

Can:•Buy and sell property•Enter into contracts•Sue and be sued

Corporations - Forming

To become a corporation, you must:

1. request permission from federal or state government – receive a charterCharter – document from government granting permission to incorporate

Corporations - Forming

To become a corporation,

you must:

2. Issue stock to shareholders/

stockholders

Stock – ownership certificatesShareholders/stockholders – investors in the business

Corporations - Forming

To become a corporation,

you may:

3. Issue dividends to shareholders/

stockholders

dividend – a check for a portion of the corporate earnings (profit)

Corporations

Advantages:

1. Ease of obtaining financial capital by:

- Selling stock to investors

– Issuing bondsbond – written promise to repay an amount at a later dateprincipal– amount borrowedInterest – price paid for use of someone’s money

Corporations

Advantages:

2. Can hire managers to run the business

Corporations

Advantages:

3. Provide limited liability for its owners

– Owners not responsible for the success of the business

– Stockholders only lose the amount they invested

Corporations

Advantages:

4. Unlimited life– Continues to exist

even if ownership changes

Corporations

Advantages:

5. Ease of transferring ownership

– Shareholders can sell stock to someone else

Corporations

Disadvantages:

1. Difficulty of getting a charter

– Filing fees, legal fees

Corporations

Disadvantages:

2. Shareholders have little say once they vote for the board of directors

– Board allows the management team to run the business

Corporations

Disadvantages:

3. Double taxation of corporate profits

– Corporate profit is taxed

– Personal income is taxed

Corporations

Disadvantages:

4. Subject to government regulations

– Registered with a state– Registered with the SEC– Keep public informed on

profits and lossesSEC (Securities & Exchange Commission) – regulates and supervises sale of stock

Taking a Loan

• Amount of Loan: $15,000• Interest on Loan: 10%• Length of Loan: 5 yrs.• Monthly Payment: $318.71• Total Paid for Loan:$19,122.60• 1st Payment: $193.71 (principal)

– $125.00 (interest)

Business Growth

• Reinvestment – investment in new plant, equipment, and technologies

Net incomeNet income – revenue minus expenses/taxes

Business Growth

• Reinvestment – investment in new plant, equipment, and technologies

DepreciationDepreciation – general wear and tear on capital goods

Business Growth

• Reinvestment – investment in new plant, equipment, and technologies

Cash flowCash flow – net income plus depreciation (bottom line)

Where is business growth taking place on the chart?

Business Growth

• Mergers – combining two or more businesses to form a single firm

•The new company, ChevronTexaco The new company, ChevronTexaco (worth $45 billion), was formed (worth $45 billion), was formed October, 2001October, 2001•With 53,000 employeesWith 53,000 employees 7% (4,000 employees) lost their jobs7% (4,000 employees) lost their jobs

Business Growth

• Why Merge?– To get bigger– To become more

efficient – To eliminate rivals– To change identity

Business Growth

• Types of Mergers– Horizontal – two or more firms that make

the same product join forces

Business Growth

• Types of Mergers– Vertical – firms

involved in different steps in manufacturing join forces

Other Types of Corporations

• Conglomerate– Corporation with

at least four businesses making unrelated products

Were very popular in ’70s and early ’80s

Other Types of Corporations

• Multinational– Corporation with

manufacturing or service operations in a number of different countries

Other Business Organizations

• Nonprofit Organizations– Promote the

interests of the members, not the financial gain of their owners

Credit Unions

Labor Unions

Professional Associations

Other Business Organizations

• Government’s Role– Direct role –

distributes goods and services to customers

– Indirect role – makes sure the markets operate smoothly