Business Organizations

Types of Firms• Sole proprietorship – a business owned and run

by one person. • In 2000, 73% of all businesses in the U.S. were

sole proprietorships.• Advantages of sole proprietorships:

-easy start-up-flexible (can make decisions quickly)

management is all you-the profits are yours-you are your own boss-no business taxes; all income for you-easy exit pay your bills and stop working

Disadvantages of sole proprietorships-unlimited liability you are responsible for

everything-it’s hard to borrow money- Size and efficiency—you have to do everything

yourself. You may be good at some things (making the product) but not at others

(keeping the financial records, doing the insurance paperwork)

-limited management experience-hard time finding qualified employees-limited life – business dies when you die

Partnerships• Partnerships – business jointly owned by two or

more persons.• In 2000, partnerships accounted for 7.1% of

business organizations in the U.S.• There are two types of partnerships:

*general partnerships – all partners actively run the business

*limited partnership – at least one partner is not active in running the business and has

limited responsibility for the debts & obligations of the business.

Forming a Partnership• It’s sort of like getting a marriage pre-nup.• Legal papers are drafted that specify:

-how profits are divided.-how new partners may join.-how property is divided if the partnership ends.

Warning You are responsible for the debts of your partners!

Advantages of partnerships:-easy to start-easy to manage-you get your share of the profits-can attract financial capital easier than sole proprietorships-larger, so some economies of scale present More efficient operations (people can specialize)-easier to attract qualified employees

Disadvantages of partnerships:-responsible for the acts of all the other partners-if you are a limited partner, not involved in daily

activity, you only lose your original investment- limited life when a partner dies or leaves, it

ends. It must be dissolved legally and reorganized with the remaining partners. (They usually want to keep the old name.)

-conflict between partners-bankruptcy – if you’re not a limited partner, you

have to pay any debts!

Corporations• Corporation – a form of business organization

that is recognized by the law as having all the legal rights of an individual.

• They have the right to buy & sell property, enter into legal contracts, and to sue & be sued.

• In 2000, corporations were 19.9% of business organizations, but were responsible for

88.8% of all sales.

Corporations

• Forming a Corporation:– File for permission from the federal (national)

government or the state where your HQ will be– “charter” is granted: states name, address,

purpose, number of shares of stock, etc.– Sell stock (“IPO”) at an initial price– Stock value goes up and down according to

your profitability– Issue dividends (hopefully)

• Corporate Structure:

Advantages of Corporations• Easy to raise financial capital

1.) sell stock2.) issue bonds a written promise to repay the amount

borrowed in the future• Hire professional managers• Limited liability for the corporation’s owners: the

corporation itself is responsible for all debts, not the owners. If it goes out of business, stockholders do not have to repay the

corporation’s debts. • Unlimited life – the firm doesn’t die when a

shareholder does.

Advantages of Corporations

• Ease of transferring ownership: If you don’t want to be part owner any more, you just sell your stock. Much easier than a sole proprietorship trying to find someone to buy the entire business.

Disadvantages of Corporations• Difficult to start• Shareholders have little say about how the

business is run• Double taxation – the firms profits are

taxed and then the profit that is distributed to shareholders is also taxed.

• Subject to government regulation.

Disadvantages of Corporations

Corporations are subject to more government regulation than sole proprietorships and partnerships. register with the state register with the Securities & Exchange Commission—the SEC—to sell stock to the public publish info on their sales and profits on a regular basis get approval to buy or merge with other companies.

LLCs - “Limited Liability Company”The major advantage of a Sole

Proprietorship is no double taxation. Its owner just calculates her profits and reports them as her income, and pays income taxes.

The major disadvantage of a Sole Proprietorship is its UNlimited liability.

For instance, if someone slips and falls in her Sole Proprietorship, the injured person could sue her for the business assets, her home, and other personal assets of the proprietor.

LLCs - “Limited Liability Company”Forming your company as an LLC instead of a

Sole Proprietorship keeps the major advantage and loses the disadvantage: it keeps single taxation but limits the liability of the owners for losses and debts of the company.

For instance, if a client slips and falls on the property of an LLC, the injured person can only sue for assets that belong to the company (not the proprietor’s personal assets).

Sole Proprietors can also take out “liability insurance” in case of accident or injury.

Multinational

• Multinational - can be an ordinary corporation or a conglomerate, but it has manufacturing or service operations in several different countries.

• Multinationals introduce new technology, generate jobs, and produce tax revenues for the host countries.

• Pay taxes in each country / must follow the law of each country

Nonprofits• Firms use scarce resources to produce goods and

services in order to make a profit for their owners.

• Other organizations operate on a “not-for-profit” basis

• A nonprofit organization operates like a business to promote the collective interests of its members rather than to seek financial gain for its owners

Nonprofits• Examples: schools, churches, hospitals, welfare

groups, and adoption agencies.• Many of these organizations are legally

incorporated to take advantage of unlimited life and limited liability.

• They are similar to profit-seeking businesses, but do not issue stock, pay dividends, or pay income taxes.

• The profits they produce are used to further the goals of the group.

Goal of Cooperatives• Cooperative - a voluntary association of

people formed to carry on some kind of economic activity that will benefit its members.

• Producer and worker cooperatives are associations in which the members join in production and marketing and share the profits.

Cooperatives

• The consumer cooperative is a voluntary association

• They buy bulk amounts of goods such as food and clothing on behalf of its members.

• The goal is lower prices for members.

Credit Unions

• An example of a cooperative is a credit union

• It is a financial organization that accepts deposits from, and makes loans to, employees of a particular company or government agency.

Professional Associations• Many workers belong to professional societies,

trade associations, or academies. For example: ABA, AMA, etc…

• Professional associations are similar to unions, but the goal is usually keeping high standards for the skill level and public perception of their profession. Membership requires keeping their standards.

• These associations also seek to influence government policy on issues that are important to them.