Chapter 8 Chapter 8 Types of Business Types of Business Organizations

Sole ProprietorshipsThe most common type of business today is the sole proprietorship. This is a business owned and managed by a single person. They account for more than 70 percent of all business in the US. However, they generate less than 5 percent of all sales by American businesses.

Example: Bart’s ComicsExample: Bart’s ComicsPage 227What was the first issue he needed to address?

Raising money to rent & renovate the store

What did he have to do next? Get a business license, site permit, register his business name

What were some initial difficulties? Business was slow, spend money on advertisements, and in-

store promotions. What occurred because of his success?

Paid back loans in 18 months & was earning a profit, added inventory, was able to secure a loan from bank.

Sole Proprietorships Sole Proprietorships AdvantagesAdvantages

• Easy to open or close - acquire funding, license, site permit, store name. It can close easily as long as outstanding bills are paid.

• Few regulations - SP’s are lightly regulated. Must locate business in zoned area & abided by labor laws for employees.

• Freedom & Control - makes all decisions without partner consent. You are your own boss.

• Owner keeps profits - You can keep all profits, there are no partners.

Sole Proprietorships Sole Proprietorships DisadvantagesDisadvantages

• Limited funds – Many SP’s at start up have limited money. Because they are new, banks are reluctant to give out loans.

• Limited life – If you leave the business, it ceases to exist because you are the owner.

• Unlimited liability – You are legally responsible for all financial aspects of the business. If the business fails and you own money, you must pay back all debts. This means you could lose your homes, cars, or personal savings.

PartnershipsPartnerships

Partnerships are businesses that are co-owned by two or more people or “partners”.Partnerships exist in all kinds of businesses:Ex. Construction, real estate, law firms, doctors offices, and investment companies.

Types of PartnershipsTypes of Partnerships• General partnerships – the most common

type, where partners share responsibility for managing the business. Each one is liable for business debts and loans.

• Limited partnerships – one or more partners is not involved in day-to-day operations. They are only liable for the funds he or she has invested.

• Limited liability partnership (LLP) – all partners are limited partners and are not responsible for the debts and other liabilities of other partners.

PartnershipsPartnershipsAdvantagesAdvantages

• Easy to open and close – similar to SP’s, settle the bills and dissolve the company.

• Few regulations – similar to SP’s, most states have Uniform Partnership Act in place to lay out partnership rules.

• Access to resources – partners mean additional funds and usually easier to secure bank loans.

• Joint decision making – more knowledge and differing perspectives

• Specialization – partner may have specific skills to offset your weakness, ex. Accounting.

PartnershipsPartnershipsDisadvantagesDisadvantages

• Unlimited liability – Both partners are responsible for the partnership’s debts.

• Potential for conflict – decision making can become a problem when two sides can not agree.

• Limited life – When a partner dies, retires, or leaves, or new partners are added, the original business does not exist legally.

CorporationsCorporationsCorporations are business owned by individuals, called stockholders.These individuals acquire ownership by purchasing stock, or shares of ownership in the corporation. Corporation that issues stock for sale that can be bought or sold freely is a private companyA corporation that retains rights over who can buy or sell the stock is called a public company

CorporationsCorporationsAdvantagesAdvantages

• Access to resources – Corporations have can borrow money from banks, or raise more money by selling stocks or issuing bonds.

• Professional managers – you can hire people with experience in financial and sales matters, which can lead to greater growth.

• Limited liability – stockholders are not liable for debts the corporation incurs, only the cost they paid for their stock.

• Unlimited life – the business will continue to operate if the owners or stockholders die, as long as it is a viable business.

CorporationsCorporationsDisadvantagesDisadvantages

• Start-up cost and effort – it is very time consuming, difficult, and expensive to set up a corporation. Vast amount of state and federal paperwork and legal assistance from a law firm.

• Heavy regulation – must prepare annual reports to the Securities and Exchange Commission (SEC), government agency that oversees the sale of stock. Prepare and list quarterly financial reports for stockholders.

CorporationsCorporationsDisadvantagesDisadvantages

• Double Taxation – they are taxed on their profits and on dividends they pay to stockholders.

• Loss of control – board of directors can vote against the owners of business and make decisions that they (owners) do not agree with.

Businesses ConsolidationBusinesses Consolidation

Sometimes companies merge together to become a mega-company. They occur for several reasons, such as: Increasing efficiency Gaining a new identity as a business Keeping rivals out of marketplace Diversifying the product line

MergersMergers

A A Horizontal mergerHorizontal merger is combining two or is combining two or more companies that produce the same more companies that produce the same product or similar products. product or similar products. A A Vertical mergerVertical merger is combining of is combining of companies involved in different steps of companies involved in different steps of producing or marketing a product. producing or marketing a product.

Examples of MergersExamples of MergersHorizontal Merger:Horizontal Merger:

In 2005, Reebok and Adidas merged together. They cut production and distribution costs by combining their operations.

Vertical MergerIn the late 1990’s Shell Oil which owned more refineries and Texaco which owned more gas stations joined together

ConglomeratesConglomerates

ConglomeratesConglomerates are when a business is are when a business is composes of several companies, each one composes of several companies, each one producing different goods and servicesproducing different goods and servicesSome famous Conglomerates you may Some famous Conglomerates you may have heard of:have heard of: General ElectricGeneral Electric AOL/ Time WarnerAOL/ Time Warner Walt DisneyWalt Disney SonySony

Franchises, Co-Ops, and Franchises, Co-Ops, and NonprofitsNonprofits

A A FranchiseFranchise is a business that licenses is a business that licenses the right to sell its products in a particular the right to sell its products in a particular area. area.

Corporation Franchisees1. McDonald’s 30,3002. Yum (KFC, Taco Bell)

29,300

3. 7 – Eleven 28,2004. Cendent (Howard Johnson, Avis)

24,600

5. Subway 21,000

FranchiseFranchiseAdvantagesAdvantages

• A sense of independence• Would receive training and information

from franchise, your success is their success.

• Provide proven products – Ex. Big Mac, Tacos, Fried chicken.

• Franchiser would pay for national or regional advertising

FranchiseFranchiseDisadvantagesDisadvantages

• Invest your money, with no assurance of being successful.

• Potential competition from same franchise within the community. Multiple McDonald’s, KFC’s, etc…

Cooperatives and NonprofitsCooperatives and Nonprofits

Cooperatives are businesses operated for the shared benefit of the owners, who are also its customers. Nonprofits are institutions that benefit society, not to make a profit.