Business OrganizationsBusiness Organizations

A A business organizationbusiness organization is an establishment is an establishment formed to carry on commercial enterprise.formed to carry on commercial enterprise.

ObjectivesObjectives

State the role sole proprietorships play State the role sole proprietorships play in our economy.in our economy.

Explain the advantages and Explain the advantages and disadvantages of a sole proprietorship. disadvantages of a sole proprietorship.

Explain the advantages and Explain the advantages and disadvantages of a partnership.disadvantages of a partnership.

Explain the advantages and Explain the advantages and disadvantages of incorporation.disadvantages of incorporation.

The Role of Sole The Role of Sole ProprietorshipsProprietorships

Sole proprietorships are Sole proprietorships are the most common form of the most common form of business organization. A business organization. A sole proprietorshipsole proprietorship is a is a business owned and business owned and managed by a single managed by a single individual. individual.

About 75% of all About 75% of all businesses are sole businesses are sole proprietorships, but most proprietorships, but most sole proprietorships are sole proprietorships are small. All together, sole small. All together, sole proprietorships generate proprietorships generate only about 6 percent of all only about 6 percent of all United States sales.United States sales.Exp 1

Characteristics of Characteristics of ProprietorshipsProprietorships

Most sole Most sole proprietorships proprietorships earn modest earn modest incomes.incomes.

Many proprietors Many proprietors run their run their businesses part-businesses part-time.time.

Exp 2

Characteristics of Characteristics of ProprietorshipsProprietorships

Advantages of Sole Advantages of Sole ProprietorshipsProprietorships

With a small With a small amount of amount of paperwork and paperwork and legal expenses, legal expenses, just about just about anyone can start anyone can start a sole a sole proprietorship.proprietorship.

Exp 3

Advantages of Sole Advantages of Sole ProprietorshipsProprietorships

A proprietorship A proprietorship is the least-is the least-regulated form regulated form of business of business organization.organization.

Exp 4

Advantages of Sole Advantages of Sole ProprietorshipsProprietorships

After paying After paying taxes, the owner taxes, the owner of sole of sole proprietorship proprietorship keeps all the keeps all the profits.profits.

Exp 5

Advantages of Sole Advantages of Sole ProprietorshipsProprietorships

Owners of Owners of sole sole proprietorshipproprietorships can run s can run their their businesses as businesses as they wish. they wish.

Exp 6

Advantages of Sole Advantages of Sole ProprietorshipsProprietorships

Besides paying Besides paying off legal off legal obligations, such obligations, such as taxes and as taxes and debt, no other debt, no other legal obligations legal obligations need to be met need to be met to stop doing to stop doing business.business.

Exp 7

Disadvantages of Sole Disadvantages of Sole ProprietorshipsProprietorships

Sole Sole proprietorships proprietorships have limited have limited access to access to resources, such as resources, such as physical capital. physical capital.

Exp 8 Exp 9

Disadvantages of Sole Disadvantages of Sole ProprietorshipsProprietorships

Human capital can Human capital can also be limited, also be limited, because no one because no one knows everything.knows everything.

Exp 10

Disadvantages of Sole Disadvantages of Sole ProprietorshipsProprietorships

Sole proprietorships Sole proprietorships also lack also lack permanence. permanence. Whenever an owner Whenever an owner closes shop due to closes shop due to illness, retirement, illness, retirement, or any other reason, or any other reason, the business ceases the business ceases to exist.to exist.

Exp 11

The biggest disadvantage of sole The biggest disadvantage of sole proprietorships is unlimited personal liability. proprietorships is unlimited personal liability.

Liability is the legally bound obligation to Liability is the legally bound obligation to pay debts. pay debts.

Exp 12

PartnershipsPartnerships

Partnerships fall into three categories:Partnerships fall into three categories:

General PartnershipGeneral Partnership In a In a general partnershipgeneral partnership, partners share equally in both , partners share equally in both

responsibility and liability.responsibility and liability.

Limited PartnershipLimited Partnership In a In a limited partnershiplimited partnership, only one partner is required to , only one partner is required to

be a general partner, or to have unlimited personal be a general partner, or to have unlimited personal liability for the firm. liability for the firm.

Limited Liability PartnershipLimited Liability Partnership A newer type of partnership is the A newer type of partnership is the limited liability limited liability

partnershippartnership. In this form, all partners are limited . In this form, all partners are limited partners.partners.

Advantages of PartnershipsAdvantages of Partnerships

Ease of Start-UpEase of Start-Up Partnerships are easy Partnerships are easy

to establish. to establish.

There is no required There is no required partnership partnership agreement, but it is agreement, but it is recommended that recommended that partners develop partners develop articles of partnership.articles of partnership.

Exp 13

Advantages of PartnershipsAdvantages of Partnerships

Shared Decision Making and SpecializationShared Decision Making and Specialization In a successful partnership, each partner brings In a successful partnership, each partner brings

different strengths and skills to the business.different strengths and skills to the business.

Exp 14

Advantages of PartnershipsAdvantages of Partnerships

Larger Pool of CapitalLarger Pool of Capital

Each partner's Each partner's assets, or money assets, or money and other and other valuables, improve valuables, improve the firm's ability to the firm's ability to borrow funds for borrow funds for operations or operations or expansion.expansion.

Exp 15

Advantages of PartnershipsAdvantages of Partnerships

TaxationTaxation

Individual Individual partners are partners are subject to taxes, subject to taxes, but the business but the business itself does not itself does not have to pay have to pay taxes.taxes.

Exp 16

Disadvantages of Disadvantages of PartnershipsPartnerships

Unless the Unless the partnership is a partnership is a limited liability limited liability partnership, at least partnership, at least one partner has one partner has unlimited liability.unlimited liability.

Exp 17

Disadvantages of Disadvantages of PartnershipsPartnerships

General partners General partners are bound by each are bound by each other’s actions.other’s actions.

Exp 18

Disadvantages of Disadvantages of PartnershipsPartnerships

Partnerships also have the potential for Partnerships also have the potential for conflict. conflict.

•Partners need Partners need to ensure that to ensure that they agree they agree about work about work habits, goals, habits, goals, management management styles, ethics, styles, ethics, and general and general business business philosophies.philosophies.

Exp 19

CorporationsCorporations

Incorporating solves many of the Incorporating solves many of the disadvantages of sole disadvantages of sole proprietorships and partnerships proprietorships and partnerships but carries with it other but carries with it other disadvantages. disadvantages.

The Definition of a Corporation

A corporation is defined as a legal entity created under the authority of the laws of a state, consisting of a person or persons who become shareholders.

The corporation’s existence is considered separate and distinct from that of its owners.

Like a real person, a corporation can enter into contracts, sue and be sued, pay taxes separately from its owners, and do the other things necessary to conduct business.

Since a corporation is an entity in its own right, it is liable for its own debts and obligations.

Advantages of Forming a Corporation

Limited liability. One of the key reasons for forming a corporation is the limited liability protection provided to its owners.

Because a corporation is considered a separate legal entity, the shareholders have limited liability for the corporation's debts.

The personal assets of shareholders are not at risk for satisfying corporate debts or liabilities.

Advantages of Forming a Corporation

Corporate tax treatment. Since a corporation is a separate legal entity, it pays taxes separate and apart from its owners

Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends. The corporation pays taxes, at the corporate rate, on any profits.

Advantages of Forming a Corporation

Attractive investment. The built-in stock structure of a corporation makes it attractive to investors.

Capital incentive. The stock structure also allows corporations to attract key and talented employees by offering them an ownership interest in the form of stock options or stock.

Advantages of Forming a Corporation

Operational structure. Corporations have a set management structure.

The owners of a corporation are shareholders, who elect a Board of Directors, which then elects the officers.

Other than the election of directors, shareholders do not participate in the operations of the corporation.

Corporate Organization

The Board of Directors is responsible for managing the corporation.

The Board sets corporate policy and the strategy for the corporation, and elects officers — usually a CEO, vice president, treasurer, and secretary — to follow the policies set by the Board, and manage the corporation on a day-to-day basis.

Advantages of Forming a Corporation

Unlimited Life. A corporation continues to exist until the shareholders decide to dissolve it or merge with another business.

Freely transferable shares. Shares of corporations are freely transferable, because as a separate entity, the existence of a corporation is not dependent upon who the owners or investors are at any one time

A corporation continues to exist as a separate entity, and is not terminated or dissolved even when shareholders die or sell their shares.

Disadvantages of Incorporation Fees. It costs money to

incorporate.

There are four types of fees: a fee to file the Articles of Incorporation with the Secretary of State, a first-year franchise tax Formalities.

The proper corporate formalities of organizing and running a corporation must be followed, to receive the benefits of being a corporation.

Disadvantages of Incorporation

Paperwork. Paperwork is a huge component of the corporate formalities that must followed.

Some of the mandatory paperwork includes: Revenue reports tax returns business bank account records records must be kept of corporate actions, including

meetings of shareholders and Board of Directors

Disadvantages of Incorporation

Disclosure of names of corporate officers and directors. Many states require that the names and addresses of corporate officers and directors be listed on one or more documents filed with the Secretary of State.

Dissolution. Since corporations have a perpetual existence, states provide a mechanism for dissolving a corporation and liquidating its assets. Dissolution is not quick or easy Disolving a corporations means gathering corporate assets, paying creditors and outstanding claims, and distributing the remaining assets to shareholders.

Tax consequences. Corporations have potential double-tax consequences — once when the company makes its profit, and a second time when dividends are paid to shareholders.

Corporations

As a corporation grows, it may decide to merge, or combine, with another company or companies.

Horizontal mergers join two or more firms in the same market.

For example, two automakers may decide to form a larger company.

Corporations Vertical mergers join two or more firms

involved in different stages of making the same good or service.

For example, an automaker may merge with the company that supplies it with rubber tires.

Conglomerates combine companies which produce completely unrelated goods or services.

Multinational corporations (MNCs) are corporations that operate in more than one country at a time.