Chapter 3

Business Organizations

Section 1

Forms of Structure

• Sole Proprietorships

• Partnerships

• Corporations

Business Firm Distribution

• Percentage of Businesses (Number of Firms)

72%

19%

9%

…………Proprietorships

…………Corporations

..………..Partnerships

Percentage of Sales

• Proprietorships …………….4%

• Corporations ……….......…83%

• Partnerships ………...…….13%

Net Income (Profits)

10% …………Proprietorships

70% …………Corporations & LLCs

20% ..………..Partnerships

•

•

•

Sole Proprietorship • A business owned and run by one

person. They are the smallest form of

a business.

Advantages

Easy to start

Flexibility of Management

Profits stay with owner

Simpler & Lower Taxes

Pride of Ownership

Easy Exit

1.

2.

3.

4.

5.

6.

Disadvantages

Unlimited liability

Difficult to raise money

Size & Efficiency

Limited Skills

Attracting Qualified Employees

Limited Life

1.

2.

3.

4.

5.

6.

Unlimited Liability

• This means that the owner

is personally and fully

responsible for all losses

and debts of the business.

Partnerships • A business jointly owned by two

or more persons.

• General

• All partners share responsibilities and rewards.

• Limited

• One or more partners do not actively participate or run the business.

Forming Because more than one owner is involved, formal legal papers called articles of partnership are usually drawn up to specify arrangements between the partners. A legally binding document that specifies the sharing of responsibilities & profits.

a Partnership •

Advantages

1.

2.

3.

4.

5.

6.

Easy to start

Ease of Management

No special or extra Taxes

Not as difficult to raise funds

Larger in size thus normally More

Easier to attract top talent

Efficient

Disadvantages Unlimited liability between partners

If one partner causes the firm to suffer a huge loss, each

partner is fully and personally responsible for the loss.

Limited Life

If one partner dies or leaves the partnership the partnership is

dissolved and a new one must be created.

Conflicts & Disagreements

Many times one partner cannot

work with the other.

e

ations

n

Corporation • It is a legal entity separa

from its owners. Corporations

can do almost anything

individual can do.

Forming a Corporation

• Articles of Incorporation – is a

written application to the state

requesting permission to form a

corporation.

• Charter – is the legal

authorization to organize a

business as a corporation issued

by the state.

Stock & Shareholders

• Common Stock – is the basic unit of ownership of a corporation.

• Shareholders (owners of common stock) own a piece of

the company. If the company sells 1000 shares of stock and you own 10 shares you own 1% of the company.

Financing a Business Common Stock – represents the basic

unit of ownership that gives the holder

partial ownership of the bricks and

mortar of the corporation.

Preferred Stock – a type of stock a

company issues to raise money. It pays

a fixed dividend and gives the owner

NO ownership in the company.

Bonds – a written promise to repay a loan with principle and interest. Normally sold in $ 1,000 to $ 10,000 increments.

•

•

•

Dividends • A payment from after tax earnings made to

shareholders of preferred and/or common stock.

Note! Not all companies pay dividends on common shares.

• Dividends are double taxed. Taxed at the corporate level and then taxed again at the personal level.

Corporate Structure The Owners of the Corporation

(Stockholders) vote for the Board

of Directors.

The Board of Directors hire and give

instructions to the officers (CEO,

CFO, COO, etc.) of the Corporation

on how they want the business run.

The Officers hire the staff and manage

the day to day operations of the

company.

Advantages 1. Easy to raise money

Stocks, Bonds, Loans,

Specialized management

etc

2.

3.

4.

5.

Limited liability to Owners

Unlimited life

Easy to transfer Ownership

Disadvantages Difficult and somewhat expensive to start

Less direct control of operations

Double taxation

Limited activities & Government Regulations

Government & Business Regulation

• Business Development • Business Regulation

• In the twentieth century

government at all levels

have passed stronger

legislation on businesses.

• Limiting rates that can be

charged

• Government also tries to

attract businesses in order to

create jobs.

• Tax credits

• Selling bonds to finance

infrastructure

• Requiring licenses to

operate

• Consumer protection laws

Section 2

Growth & Expansion

• Growth through Reinvestment

• Reinvestment is taking the company’s profits

(net income) and using that money for growth

and expansion.

• Growing through Mergers

• Acquisition of another company also known as a

merger allows the company to grow faster than

it can grow by reinvestment.

ey se

hing

Estimating Cash Flows • Net Income

• Net Income are the funds leftover from revenues after

the company deducts expenses and taxes.

• Depreciation is the non-cash charge taken for the wear and tear on its capital goods.

• Cash Flow is the combination of net Income and

Depreciation.

• Reinvesting

• Companies takes this money and improves their

facilities and operations by re-investing this mon

in themselves. However, they sometimes use th

funds to buy other companies who do the same t they do or a supplier. This is considered mergers and acquisitions.

Types of Mergers • Horizontal Mergers – between

companies that produce the same types of goods or services.

Vertical Mergers – between companies involved in different steps of manufacturing or marketing process.

Note! – Mergers are a way for

businesses to grow faster, become

more efficient, or eliminate

competition.

•

•

Other Business Classifications

• Conglomerate – is a firm made up of many unrelated

divisions or subsidiaries.

• To qualify as a conglomerate the firm must own four or more

different companies, non of which contribute a majority of its

sales.

• Diversification is one of the main reasons to form

conglomerates.

• Multinational Business – is a firm that sells and produces

products in multiple countries.

• They are important because they can

move resources, financial capital, and

goods and services across national

boundaries.

Section 3

Other Business Classifications

• Nonprofit Organizations –

operate in a business like

manner to promote the

collective interests of its

members rather than seek

financial gain.

Cooperatives • Consumer

• A voluntary association of consumers that work together to buy goods in bulk to benefit the association thus reducing prices.

• Service

• Service cooperatives usually provides services like insurance, credit, etc. One good example is a Credit Union

• Producer

• A producer cooperative helps members sell or market items produced by its members. Farmer coops or manufacturer coops etc. are some examples.

Labor, Professional and Business Organizations

• Labor Unions – an organization of

workers formed to represent its members

interests in employment matters.

• Professional Associations – a group

formed to improve working conditions,

skill levels, and public perception of the

profession. AMA, ABA etc.

Business Associations

• Trade associations and other business special interest

groups work to promote the collective interests of

those businesses.

• Chamber of Commerce – promote community,

economic growth, education and other community

interests.

• Better Business Bureaus – provide general information

on companies in the community and keep records on

consumer inquiries and complaints.

Government’s

• Direct Role – is when

government competes with

Role

private industry. The United

States Postal Service, FDIC and

the TVA are examples of

government competing with

private business.

Government’s Role (continued)

• Indirect Role – when government

intervenes to insure a market

economy works smoothly and

efficiently. Examples include the

regulation of public utilities and the

enforcement of anti-trust laws to keep

competition in place.