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Business OrganizationsChapter 8
Sole ProprietorshipsBusiness organization is an
establishment formed to carry on a commercial enterprise
Sole Proprietorships Are the most common type of
business organizationManaged by a single individualThat person earns all profits, is
responsible for all of the firms debts
Sole Proprietorships Advantages
A. Easy to start up- small amount of paperwork and legal expense 1. obtain a business license 2. Obtain a site permit for physical business 3. Register business name
B. Relatively few regulations Least regulated form of business Subject to health codes, zoning laws
C. Sole receiver of profit Owner keeps all profits after taxes
D. Full Control Owner can run business as they wish Can respond quickly to changes in the marketplace
E. Easy to discontinue After all debts and obligations paid there are no other legal obligations to
business
Sole Proprietorships Disadvantages
A. Biggest disadvantage is liability (legally bound obligation to pay debts)
Sole proprietors are personally responsible for all business debts (unlimited liability)
B. Limited access to resources Difficult to expand business Hard to acquire funding and loans from banks Hard to find employees- can’t offer security,
advancement or fringe benefits of larger business organizations
C. Lack of permanence Has a limited life Death, retirement, loss of interest by owner business
ceases to exist
Partnerships A business owned by two or more persons who agree on a specific
division of responsibility Three different types of partnerships
I. General Partnership All partners share equally in responsibility and liability
II. Limited Partnership Only one partner has unlimited personal liability for the firms actions Other partners do not actively run business Limited partners can only lose initial investment
III. Limited Liability Partnerships New type of business organization All partners protected from liability in certain situations
Partnerships AdvantagesA. Ease of start-up
Written partnership agreements called articles of partnership spell out each partners rights and responsibilities
Uniform Partnership Act uniform state law adopted by most states that establish rules for partnerships
1. Requires common ownership interest
2. Profit and loss sharing
3. Shared management responsibilities
B. Partnerships are subject to few government regulations
C. Shared decision making Each partner bring different strengths and skills to the business
D. Larger pool of capital More assets improve the ability to expand business and borrow funds Easier to attract employees
E. Taxation Partners pay taxes only on their profits
PartnershipsDisadvantages
A. Unlimited liability, except in LLP or LP
In LP general partner has unlimited liability
B. Lack of absolute control
C. Potential for conflict between partners
Corporations, Mergers and Multinationals
Most complex form of business organization Corporation is a legal entity Owned by individual stockholder, each stockholder has limited
liability for firm’s debts Stock is a share of ownership in a corporation Corporation is considered a legal entity
It pays taxes Engages in business Makes contracts Can sue other parties, and get sued
Two types of corporations Closely held corporations stock held by a few people Stock rarely traded Publicly held corporations Many shareholders Stocks bought and sold on the open market (stock exchanges)
All corporations have the same basic structureA. Stockholders elects a board of directors to make major decisions
for the for corporation
B. Board hires professional managers to run day to day business
Corporations, Mergers and Multinationals
Advantages of Incorporation Limited liability to owners
Individual investors do not responsible for corps. actions, lose only money they have invested in business
Transferrable ownership Stockholders can sell stocks to others
Ability to attract capital Easier to grow company Can sell stocks to raise capital Can sell bonds (a formal contract to repay borrowed money at a
fixed rate at intervals) Long life
Company outlasts original owners, can do business indefinitely
Corporations, Mergers and Multinationals
Disadvantages of Corporations Difficult and expensive to set up
Must file for state corporate charter (certificate of incorporation)
Double Taxation Corporations are legal entities and need to pay taxes on
their income Stockholders also pay taxes on their dividends (portion
of corporate profits paid to stockholders) When stockholders sell their stock pay a tax called
capital gains tax if they make a profit Loss of control
Professional managers don’t always act in the best interest of the company
More regulation Must hold annual meetings for shareholders Publically traded companies required to make annual
reports to the Securities Exchange Commission
Corporations, Mergers and Multinationals
Corporate Combinations Companies combine with other companies to create larger
more efficient firms Can sell goods at a lower price
Three types of mergers Horizontal Merger
Two or more companies that compete in the same market and provide the same good or service
Try to improve efficiency, reduce costs and boost revenue Monitored closely by the federal government so they do not create
a monopoly Vertical Merger
Companies involved in different stages of producing good or service
New firm can control all phases of production Typically do not lessen competition
Conglomerate Buy companies that produce unrelated goods Have more that three businesses that produce unrelated products One business earns a majority of the firms profits
Corporations, Mergers and Multinationals
Multinational Corporations Produce goods throughout the world Operate in more than one country at a time Must obey laws and pay taxes in all countries
where they operate Many have operating budgets bigger than most
governments Advantages
Provide jobs Spread technology Help poorer nations improve their standard of living
Disadvantages Have too much influence over culture and politics in
countries where they operate Working conditions are poor
Other OrganizationsBusiness franchiseSemi independent business that
pays fees to parent company In return it has the exclusive right
to sell a certain product in a given area
Franchiser (parent company) develops products and works with local franchise to produce and sell product Allows owners a degree of control
and owners benefit from support of parent company
Other OrganizationsAdvantages
A. Come with a built in reputation
B. Management and training support
C. Standardized quality owners follow certain rules and processes to guarantee product quality
D. National advertising
E. Financial assistance
F. Centralized buying power buy materials in bulk to keep costs down
Disadvantages
G. High franchising fees and royalties Royalties are a share of earnings
B. Strict operating standards Must follow all rules in the franchise agreement
C. Purchasing restrictions
D. Limited product line can only sell approved products
Other OrganizationsCooperatives Business owned and operated by a
group of individuals for their shared belief Three categories Consumer Cooperatives (purchasing
cooperatives) Sell merchandise to their members at
reduced prices Make large purchases in bulk to obtain
goods at a lower cost Service Cooperatives
Provide a service at a discounted price Producer cooperatives
Help members sell their products (usually agricultural products)
Other Organizations Nonprofit Organizations
Business that does not operate for a profit
Usually tries to benefit society Exempt from income taxes Some operate with partial government
support Almost all provide services rather than
goods Professional Organizations
Improve image, working conditions, set codes of conduct and skill of people in particular occupations
Labor Unions Organized group of workers Attempt to improve working conditions,
wages and fringe benefits