Chapter Seven

Business Organization

The Three Types of Business OrganizationSole ProprietorshipPartnershipsCorporations

Sole Proprietorship If you alone own and

control the service.

Opportunity Benefits of Sole Proprietorships Owner has direct

control Small initial

investment Owner receives all

profits Owner can dissolve

business when necessary.

Opportunity Costs of Sole Proprietorships

All losses are borne by owner

Difficulty in raising financial capital Limited growth potential

Only one person in authority

Lack of longevity Unlimited liability

Partnerships A business owned

and controlled by two or more people.

                                                   

     

REMEMBER! Partnerships don’t

have to be just two people.

JC Penney: The man with a thousand partners.

Two forms of partnerships General Partnerships:

Equal decision making. Limited Partnerships:

Partners join as investors, offering capital, but little, if any, role in decision making. VENTURE

CAPITALISTS

Advantages of Partnerships Two or more individuals

own the business. Specialization

Losses are shared by partners.

More money is available to invest in business

Sharing management responsibilities

Taxes are shared by partners

Disadvantages of Partnerships

Division of authority Unlimited liability. Difficulty in raising

additional capital. Lack of longevity. Legal complications

when there is a change in ownership.

Advantages of CorporationsLimited liability.Easy to raise needed

capital.Business owned by a group

of individuals.Responsibilities for running

the business divided among many individuals

Easy change in ownership and business continues as long as it makes profits. – LONGEVITY.

Disadvantages of Corporations

Corporate charters are $$$

Federal and state govts. monitor corporations more.

***Slow process of decision making.

Corporations Legally distinct from

their owners and treated as if individuals. Corporations can

Own property Hire workers Make contracts Pay taxes Sue and be sued Make and sell products.

What kind of companies are organized as corporations?USUALLY – food, steel, oil companies

are corporations. Insurance companies, supermarket

chains, major companies.

Forming a corporation When expansion

calls for more than adding more partners.

GET A LAWYER!

Forming a corporation: Lawyer applies for a

state license: ARTICLES OF INCORPORATION.

Reviewed by state officials. If all in order they grant CORPORATE

CHARTERS

Corporate Structure The corporate

charter identifies the officers. Chairman of the

board – symbolic head of the corporation.

CEO – Chief Executive Officer – the REAL power.

Corporate Structure Board of Directors –

people from inside or outside the company. Key decision making

body. Decide on product lines. Hires / fires corporate

officers to do the day-to-day running of the corporation.

Sees that boards policies are carried out.

Corporate Finances Most common way

to raise money is selling STOCK. STOCK – represents

ownership of the firm.

Ownership is issued in portions called SHARES.

Corporate finances If you buy 100

shares of stock in a company, you own 100 pieces of that company. If that company has a total of 10,000 shares available – you own 1% of the company.

Why own stock? DIVIDENDS –

profits on your investment. PREFERRED

STOCK – guarantees dividends.

COMMON STOCK – potential for dividends.

Why own stock? SOMETIMES can

make more money for you.

The “fun” of being involved with a corporation or a product.

Benefits for stockholders Flexibility of

ownership. Limited liability.

Can’t be sued for corporate problems.

If the corporation folds, you only lose what you invested.

Private assets can’t be seized.

The trade-off Common stock

ownership allows a “voice” on how the company is run.

Preferred stock does not.

IMPORTANT ADVICE TO FUTURE CORPORATE HEADS!!!

ALWAYS hold or directly control 51% of your company’s stock.

OR have a lack of control at annual shareholder meetings.

You can lose your job!

Other disadvantages! If you own stock,

corporate profits are taxed twice. You pay taxes as

being a member of the corporation.

You pay taxes on the profits / dividends you take.

The corporation raises money If there are

thousands of shareholders, there is enormous amounts of money through the sale of stock.

eBay has 6,643,058 shares available.

Other ways corporations raise $$. Corporate bonds.

You loan your money to the company.

You DO NOT own the company.

Repaid the principal and the interest.

Principal – the actual money borrowed.

Interest – the price you gave to that principal.

Example of Corporate Bonds You hold a 1 year

$1,000 bond. At the end of the

year you are paid back the $1,000 principal AND the 5% ($50) interest.

Corporate Combinations Most corporations

seek to expand. Build new facilities Legally combines

with another enterprise.

MERGERS!

Three types of Mergers (corporate combinations) Horizontal Vertical Conglomerate

Horizontal Combination Buying up

companies involved in the same industry.

THINK STANDARD OIL – John D. Rockefeller.

Horizontal combinations All the companies

merging do the same thing.

Standard Oil: all the companies Rockefeller bought, processed oil into gas.

Vertical Combination A merger between

two or more companies involved in different production phases of the same good or service.

THINK US STEEL / Andrew Carnegie.

Conglomerate Combinations. Merger of

companies producing unrelated products.

Subsidiaries. Started in the 1960s.

BERKSHIRE HATHAWAY INC.

Acme Brick Company Johns Manville

Ben Bridge Jeweler Jordan's Furniture

Benjamin Moore & Co. Justin Brands

Berkshire Hathaway Group Larson-Juhl

Berkshire Hathaway Homestates Companies

McLane Company

Borsheim's Fine Jewelry MidAmerican Energy Holdings Company

Buffalo NEWS, Buffalo NY MiTek Inc.

Clayton Homes Nebraska Furniture Mart

CORT Business Services NetJets®

CTB Inc. The Pampered Chef®

Fechheimer Brothers Company Precision Steel Warehouse, Inc.

FlightSafety RC Willey Home Furnishings

Fruit of the Loom® Scott Fetzer Companies

Garan Incorporated See's Candies

GEICO Direct Auto Insurance Shaw Industries

GEICO Direct Auto Insurance

Shaw Industries

General Re Star Furniture

Helzberg DiamondsUnited States Liability Insurance Group

H.H. Brown Shoe GroupWesco Financial Corporation

International Dairy Queen, Inc.

XTRA Corporation

Opportunity Benefits of Combinations Efficiency –

centralized decision making.

Potential lower costs.

Easier to acquire financial capital.

Opportunity Costs of Combinations Can lead to

unemployment (don’t need to double the jobs)

Reduced competition in the market place. MONOPOLIES.

Franchises One company

agrees – for a fee – to let another person or group set up a FRANCHISE. Have to uphold the

reputation of the parent company.

Get training and advertising.

Cooperatives Co-ops –

businesses owned by their members. Membership gives

privileges.

Cooperatives

Nonprofit Organizations Does not focus on

financial gain and profits.

Business organization but pursues other goals.

Income isn’t taxed.

D