C hapter 7 Business Ownership and Organization: Proprietorships, Partnerships, and Corporations ©...

CChapter 7hapter 7

Business Ownership and Organization: Proprietorships, Partnerships, and Corporations

© 2002 South-Western

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Economic PrinciplesEconomic Principles

• Sole Proprietorships

• Partnerships

• Corporations

• Unlimited and Limited Liability

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Economic PrinciplesEconomic Principles

• Stockholders (Shareholders)

• Stocks and Bonds

• International and Multinational Corporations

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Business Ownership Business Ownership and Organizationand Organization

Businesses can be categorized into three main types:

• Proprietorships.

• Partnerships.

• Corporations.

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• These types of businesses differ based on who owns the business and how the business is organized.

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• There are advantages and disadvantages associated with each of these types of businesses.

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Sole ProprietorshipSole Proprietorship

Sole proprietorship

• A firm owned by one person who alone bears the responsibilities and unlimited liabilities of the firm.

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• In order to set up a sole proprietorship, owners usually rely on their own financial means to purchase, rent, or hire physical plant, raw materials, and labor.

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• Sole proprietorships hire principally, but not exclusively, family labor.

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• Most sole proprietorships produce for local markets.

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• Sole proprietors have unlimited liability.

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Unlimited liability

• Personal responsibility for all debts incurred by the business. The owners’ personal wealth is subject to appropriation to pay off the firm’s debt.

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1. What might be some advantages of sole proprietorships?• Personal independence for the proprietor.• A focus on local markets.• A lack of bureaucratic structure.• Access to familiar or even family labor.

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2. What is an important disadvantage of sole proprietorships?

• Sole proprietors have unlimited liability.

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PartnershipPartnership

Partnership

• A firm owned by two or more persons who each bear the responsibilities and unlimited liabilities of the firm.

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• By coupling finances between two or more partners, the productive capacity of the business can be increased.

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• These increases in productive capacity may not have been possible under the sole proprietorship form of business.

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• Decisions are made jointly in a partnership.

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• Each partner is still personally liable for all of the debts incurred by the business.

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1. What are some advantages of partnerships?• Shared responsibility among the partners.

• Greater access to capital.

• Potential for increases in productive capacity.

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2. What are the disadvantages of partnerships?

• Decisions are made jointly and may be challenged by the other partners.

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2. What are the disadvantages of partnerships?

• Each partner may be liable for 100 percent of the debts incurred by the business -- regardless of the size of the investment in the business.

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CorporationCorporation

Corporation

• A firm whose legal identity is separate from the people who own shares of its stock.

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Stockholder or shareholder

• A person owning stock in a corporation.

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• A corporation is recognized as an independent person through a state charter.

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• Like any other legal person, corporations are subject to the laws of the state, have the right to organize for business and can sue and be sued.

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• The liability of each stockowner in a corporation is limited only to what he or she has invested in the firm.

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CorporationCorporationWhat are the major disadvantages of corporations?

• One disadvantage is double taxation. Both the owners and the corporation itself pay taxes on the same corporate income.

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• Another disadvantage, from the stockholders’ point of view, is that stockholders exercise corporate control only theoretically. Management is in a much stronger position to actually control the corporation.

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EXHIBIT 1 U.S. CEO-TO-WORKER PAY RATIO

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• A third disadvantage is the threat of corporate takeover. An outsider may decide to buy up enough common stock to own the corporation outright.

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Corporate StockCorporate Stock

Stock

• Ownership in a corporation represented by shares that are claims on the firm’s assets and earnings.

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Dividends

• The part of a corporation’s net income that is paid out to its stockholders.

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There are a variety of kinds of stock that a corporation can issue. Three examples include:

• Common stock.

• Preferred stock.

• Convertible stock.

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1. What is common stock?

• Stockholders vote and receive dividends in proportion to the quantity of stock they own.

• Dividend returns are not fixed.

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2. What is preferred stock?

• Carries no voting privileges.

• Has a fixed dividend yield.

• Has prior claims on dividends over common stock.

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3. What is convertible stock?

• Carries no voting privileges.

• Yields a fixed dividend.

• Has prior claims on dividends over common and preferred stock.

• Gives stockholders the privilege of converting their stock to common stock.

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Corporate BondsCorporate Bonds

Corporate bonds

• A corporate IOU. The corporation borrows capital for a specified period of time in exchange for this promise to repay the loan along with an agreed-upon rate of interest.

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US Business US Business OrganizationOrganization

• There is great diversity throughout the US in terms of business organization.

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• One can find on almost every square inch of the economic landscape almost every form of business organization.

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• Each of the three forms of business organization have been growing over the years, both in terms of number of businesses and receipts (or dollars) generated by the businesses.

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• There is a disparity between the number of businesses, and the volume of business, however.

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• While partnerships dominate the current economic landscape in terms of number, corporations dominate in terms of volume of business.

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EXHIBIT 2 PROPRIETORSHIPS, PARTNERSHIPS, AND CORPORATIONS: 1970–96 (000s AND $BILLIONS)

Source: Bulletin, Statistics of Income, Summer 1992, Internal Revenue Service, Washington, D.C., pp. 161–163; Statistical Abstract of the United States, 1999, Department of Commerce, Washington, D.C., p. 545.

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Exhibit 2: Proprietorships, Exhibit 2: Proprietorships, Partnerships and Partnerships and

Corporations: 1970-96Corporations: 1970-96

1. How were firms organized in terms of number in the U.S. in 1996?

• There were almost 17 million proprietorships, representing 75 percent of the total number of operating businesses.

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• Corporations came in second with over 4.5 million.

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• Partnerships represented the smallest segment, with close to 1.7 million.

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2. How do firms compare in terms of volume of business in the U.S. in 1993?

• Corporations clearly dominated with over $11.8 trillion, or 89.5 percent of receipts.

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• Proprietorships came in second with $757 billion, or 5 percent of total receipts.

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• Partnerships brought in only $627 billion.

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EXHIBIT 3 SIZE OF CORPORATION AND CORPORATE RECEIPTS, 1996 (000s AND $BILLIONS)

Source: Statistical Abstract of the United States, 1999, Department of Commerce, Washington, D.C., p. 545.

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Exhibit 3: Size of Exhibit 3: Size of Corporation and Corporation and

Corporate ReceiptsCorporate Receipts

• The disparity that exists between numbers of businesses and volume of business exists within the corporate ranks, as well.

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• 3.79 billion corporations with receipts under $1 million make up 82 percent of all of the corporations.

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• These corporations account for only 5.2 percent of total receipts, however.

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• The 22,000 corporations with receipts over $50 million account for 68.6 percent of total corporate receipts.

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EXHIBIT 4 NUMBER AND CHARACTERISTICS OF STOCKHOLDERS: (000s)

Source: Shareownership 1997, New York Stock Exchange, 1998, p. 59. Data are for 1992.

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Exhibit 4: Numbers and Exhibit 4: Numbers and Characteristics of Characteristics of

Stockholders: 1992Stockholders: 1992

Who were stockholders in the U.S. in 1992?

• 70 percent of stockholders had some college education.

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• Over 55 percent of stockholders earned more than $50,000 per year.

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• About 50 percent of stockholders were 44 years old or younger.

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EXHIBIT 5 SIZE DISTRIBUTION OF STOCK PORTFOLIOS

Source: Shareownership 1997, New York Stock Exchange, 1998, p. 59. Data are for 1992.

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Exhibit 5: Size Exhibit 5: Size Distribution of Stock Distribution of Stock

Portfolios: 1992Portfolios: 1992

• The distribution of stock ownership is highly skewed.

• A small number of shareholders own a large percentage of shares.

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Exhibit 5: Size Exhibit 5: Size Distribution of Stock Distribution of Stock

Portfolios: 1992Portfolios: 1992

• 17 percent of the shareholders in 1992 owned over 80 percent of the stock.

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Indirect Stock Indirect Stock OwnershipOwnership

• Some people own stock indirectly through pension plans, life insurance policies, and other financial intermediaries.

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• These indirect stock owners are not accounted for in regular tallies of stock owners.

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• If indirect stockowners were accounted for, it is reasonable to argue that corporate stocks are held by, or on behalf of, a vast majority of the US population.

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International and International and Multinational Multinational CorporationsCorporations

International corporation

• A corporation whose production facilities are located in one country, but whose exports to other countries overshadow its domestic trade.

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Multinational corporation

• A corporation whose production facilities are located in two or more countries. Typically, multinational corporations are also international.

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What is a possible disadvantage of multinational corporations?

• It becomes increasingly difficult for individual national governments to regulate large multinational firms.

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EXHIBIT 6 FOREIGN REVENUES AS A PERCENTAGE OF TOTAL REVENUES AND FOREIGN ASSETS AS A PERCENTAGE OF TOTAL ASSETS FOR THE TEN LARGEST U.S. MULTINATIONALS: 1985 AND 1999

Source: Forbes, July 29, 1985, and July 24, 2000. Reprinted by permission of Forbes Magazine © 2000. Forbes, 1985 and 2000.

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Exhibit 6: Foreign Revenues as a Exhibit 6: Foreign Revenues as a Percentage of Total Revenue and Percentage of Total Revenue and Foreign Assets as a Percentage of Foreign Assets as a Percentage of Foreign Assets for the 10 Largest Foreign Assets for the 10 Largest

US MultinationalsUS Multinationals• Four of the top ten multinational corporations in 1999 were either oil or automobile corporations.

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Exhibit 6: Foreign Revenues as a Exhibit 6: Foreign Revenues as a Percentage of Total Revenue and Percentage of Total Revenue and Foreign Assets as a Percentage of Foreign Assets as a Percentage of Foreign Assets for the 10 Largest Foreign Assets for the 10 Largest

US MultinationalsUS Multinationals

• Exxon/Mobil draws a large percentage of its total revenues from foreign operations.

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