Business Organization

General Information

Business firm—an organization that brings together the factors of production for the purpose of producing or distributing goods and services

80% of total production comes from private businesses Firms must pass the market test Specialization and division of labor Risk Can group businesses by industry or legal form of

organization

Sole Proprietorship

Definition Business firm owned by a single individual or married couple who makes all of the decisions and receives all of the profits

Most common type nearly 80% of all businesses

Represent about 6% of business receipts Most businesses start as sole proprietorships

Advantages of Sole Proprietorships

Easy and inexpensive to create Owner receives all profit Owner has complete discretion Owner personally knows customers and

employees Minimal government regulation Usually pays less income tax than other

business forms

Disadvantages of Sole Proprietorships

Unlimited liability Limited fundraising ability Limited life Owner may lack special skills and

abilities

How to Set Up A Sole Proprietorshiphttp://www.citmedialaw.org/legal-guide/california/becoming-sole-proprietor-california

Prepare a business plan Decide on a business name and register it Obtain local licenses

Business license-legal document that allows one to operate a business

http://www01.smgov.net/finance/licenses/pdf/BusinessLicenseInformationHandout.pdf

http://www01.smgov.net/finance/licenses/pdf/Application.pdf Determine tax and regulatory obligations and apply for EIN Open bank account Other considerations

Zoning laws—where one can legally locate a business

Partnerships

Form of business organization that is collectively owned by two or more people who jointly make business decisions, share the profits and bear financial responsibility

for the loss

Only about 9% of businesses, about 4% of all business receipts

Partnerships

General Partners Limited Partners Limited Liability Partnership Uniform Partnership Act Joint Venture Strategic Alliance

Advantages of Partnerships

Inexpensive/easy to create General partners have complete control Skills/abilities can be pooled Improved credit position Less tax burden than corporations Elimination of competition Continuity of business Profits split between partners

Disadvantages of Partnerships

Unlimited liability Partners must share profits Disagreements among partners Each partner is bound by the contracts of

the others If partner dies, partnership ends Difficulty withdrawing from partnership

Making a Partnership Work

Partners should…. Share business responsibilities Put everything in writing Always be honest about how the business is

doing Establish a partnership agreement in

advance to establish guidelines about profit sharing, business responsibilities, and what happens if a partner dies/wants to quit

Corporations

Businesses that are registered or chartered by a state

Roughly 20% of firms, but account for 90% of business receipt

Articles of incorporation a written application requesting permission to form a corporation

Charter the legal authorization to organize a business as a corporation

CorporationsClosely Held Corporation limited number of

shareholders Publicly Held Corporation stock owned by

members of the general public and openly traded

Multinational Corporation firm managed from one country, but derives roughly 25% of its revenue from operations outside of its home country

Conglomerate corporation made up of several different firms that supply diverse products (Hyundai)

Corporate Structure

Corporate Structure Video http://www.investopedia.com/video/play/

corporate-structure

Advantages of Incorporation

Fundraising ability Limited liability Unlimited life Specialized management Risks of business are spread among

many owners

Disadvantages of Incorporation

More difficult/expensive to start Owners have less direct control Double taxation (profits and then as

shareholder’s dividend income) Limited to activities stated in articles of

incorporation

Financing a Corporation

Bonds certificate stating the amount the corporation has borrowed from the holder of the bond and the term of repayment

Stockshare of ownership in a corporation Common stockgives owners voting rights,

capital appreciation, dividends (quarterly) Preferred stock guaranteed dividends and

first to be paid dividends

Advantages of Multinationals

Gaining a strong foothold into the international market (volume)

Ability to take advantage of cheaper factor, location and distribution costs

Tax incentives Access to new technologies and

methodsresearch and development

Disadvantages of Multinationals

Trade restrictions Taxes or tariffs imposed on imports from

other countries Limited quantities (quotas) of imports Management problems

Comparison

Sole Proprietorship

Partnership Corporation

Start-Up Costs

Liability

Continuity of Business

Control of Business

Distribution of Profits

Transfer of Interest

Business Franchise

The right to sell a good or service within an exclusive market

Franchise royalties: money paid by the franchisee to the franchisor to cover the franchisor’s overhead costs (education, training, branding etc.)

Advantages of Franchises

High likelihood of success given name recognition.

Franchisee seen as less risky of a borrower

High level of training and support provided by franchise company

Franchise company provides national level advertising (franchisee avoids some of this cost)

Disadvantages of Franchises

Can be costly to implement depending on royalty payments established by franchise agreement

Limited creativity in effort to maintain brand.

Attention to detail

a must.

Other Organizations

Cooperative Consumer Cooperative Service Cooperative Producer Cooperative Nonprofit Organization Professional Organization

Mergers

Mergers

Types Horizontal Vertical

Conglomerate

The Federal Trade Commission (FTC)

Established in 1914 Evaluates potential mergers Identifies anti-competitive behavior Promotes competition in key industries Provides information to consumers

Competition

Wealth of Nations Free markets guided through competition

in a way that individuals, acting in their self interest, will be led to achieve what is best for society

Economic efficiency if waste occurs, firm loses part of profit

Firms do not make excessive profit Consumers benefit from lower prices and

higher quality