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Types of Business Organizations

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Chapter 8: Types of Business Organizations

KEY CONCEPT• Most of the producers in a market economy are business

organizations, commercial or industrial enterprises and the people who work in them. The purpose of most business organizations is to earn a profit.

WHY THE CONCEPT MATTERS• Businesses vary in size and are organized differently. The American

free enterprise system allows producers to choose the kind of business organization that best suits their purpose.

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The Characteristics of Sole ProprietorshipsKEY CONCEPTS

• Business organizations—produce goods, provide services– purpose of most is to earn profit – supply most products in market economy; provide jobs, income;

pay taxes• Sole proprietorship—owned and managed by single person

– Make up 70 percent of U.S. businesses, but generate only 5 percent of all sales

Sole Proprietorships

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The Characteristics of Sole Proprietorships

EXAMPLE: Bart’s Cosmic Comics • Steps Bart followed to set up and run a new business

– raised funds to rent space, stock store through savings, loans– obtained licenses, site permit; registered name– ran advertisements, promotions to get customers– paid back loans; began earning profit; expanded

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Sole Proprietorships: Advantages and DisadvantagesKEY CONCEPTS

• Not governed by as many regulations as other types of businesses• Have limited life—close if owner dies, retire, or leaves business • Owners have unlimited liability—responsible for all losses, debts

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Sole Proprietorships: Advantages and DisadvantagesAdvantages: Sole Proprietorships

• Easy to open or close as long as owner settles all bills• Must meet few regulations; possibly zoning, labor laws for employees• Owner makes own decisions, controls business; personal satisfaction• Owner keeps all profits

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Sole Proprietorships: Advantages and DisadvantagesDisadvantages: Sole Proprietorships

• Have limited funds, especially at start-up• Have limited life• Have unlimited liability—owner personally responsible for all debts

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Mary Kay Ash: Going It Alone

Building a Business• Ash decided to create business that would reward working women• Mary Kay, Inc. sells cosmetics, other products at in-home parties• In first year, 1964, sales exceeded $198,000• Incentives to consultants include pink Cadillacs, diamond jewelry• In 2005, 1.6 million consultants in 30 countries had $2 billion sales

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Reviewing Key Concepts

Explain the relationship between the terms in each of these pairs:

• business organization and sole proprietorship• limited life and unlimited liability

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The Characteristics of PartnershipsKEY CONCEPTS

• Partnership—business co-owned by two or more people– partners agree on division of responsibilities, profits, and losses

• Found in all areas of business – very common in professional and financial services

Forms of Partnerships

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The Characteristics of Partnerships

Type 1: General Partnerships • General partnership—most common type • Partners share responsibilities, profits, debts, losses equally

– partnership agreement can specify otherwise

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Type 2: Limited Partnerships • Limited partnership—at least one limited partner

– not involved in running business – liable only for funds he or she invested

• Must have general partner who runs business, is liable for all debts– money for business comes from limited partners

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Type 3: Limited Liability Partnerships• Limited liability partnership (LLP)—all partners are limited

– not responsible for liabilities of other partners• Not all businesses can register as LLPs

– only those in which malpractice can be an issue

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Partnerships: Advantages and Disadvantages

KEY CONCEPTS • Advantages, disadvantages similar to those of sole proprietorships• Some differences because owners work together

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Advantages: Partnerships• Easy to start up and dissolve• Few regulations: legal agreement; Uniform Partnership Act (UPA)• More funds means easier to get loans, attract employees• Joint decision making: partners bring different perspectives• Partners can specialize, promoting efficiency

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Disadvantages: Partnerships• Unlimited liability

– partners risk personal savings and property to cover debts• Potential for conflict if many partners must agree on decisions• Limited life—if partner leaves or joins new agreement must be drawn

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• partnership and general partnership• limited partnership and limited liability partnership

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Characteristics of CorporationsKEY CONCEPTS

• Corporation—stockholders have rights to profit, limited liability • Stock—shares of ownership in a corporation • Dividend—part of a corporation’s profit paid out to stockholders • Public company—issues stock that can be freely bought and sold • Private company—controls who can buy or sell its stock

Corporations, Mergers, and Multinationals

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Characteristics of Corporations

EXAMPLE: F & S Publishing, Inc. • F & S owners have no personal liability; only assets of business at

risk• Owners hire lawyers to file legal documents to incorporate• State government grants corporate charter:

– registers name, address, purpose; specifies amount of stock can sell

• Stockholders elect board of directors which hires corporate officers

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Corporations: Advantages and Disadvantages

KEY CONCEPTS • Bond—contract issued by corporation

– promises to repay borrowed money, plus interest on fixed schedule

• Limited liability—owner’s liability for debts and losses is limited• Unlimited life—corporation continues to exist even if owners change

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Advantages: Corporations• Can raise money in various ways:

– borrowing from banks, selling more stock, issuing bonds• Professional managers likely to produce higher profits• Limited liability—stockholders, directors, officers protected • Unlimited life—business operates as before if stockholders change

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Disadvantages: Corporations• Starting up: time-consuming, difficult, expensive; paperwork, lawyers• Heavy regulation, specially for public companies

– annual SEC reports, quarterly financial reports, stockholder meetings

• Both profits and dividends taxed; some small corporations excluded• Decisions made by board; founders must give up some control

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Business Consolidation

KEY CONCEPTS• To increase efficiency, gain new identity, keep rivals out, diversify• Horizontal merger—joins companies with same or similar product• Vertical merger—joins different steps of production, marketing• Conglomerate—combines companies with unrelated products• Multinational corporation—has branches in several countries

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Mergers• In 2005, Reebok and Adidas made horizontal merger

– meant to cut production, distribution costs by combining operations

– purpose to undersell and take customers from Nike• In 1990s, Shell and Texaco made vertical merger

– Shell had more refineries; Texaco more gas stations for distribution

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Conglomerates• Theory: diversified businesses protect parent company • Practice: difficult to manage unrelated companies• 1960s Gulf and Western in communications, clothes, mines, food

– eventually sold all except entertainment, publishing; became Viacom

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Multinational Corporations• Multinational, or transnational, corporations increase globalization• Benefits: provide jobs, products; spread technology; pay taxes

– help raise standard of living of poor countries• In countries with lax regulations, factories may cause problems

– pollution, long work hours, unsafe conditions

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Bill Gates: Entrepreneur and Corporate LeaderMicrosoft Corporation

• With Paul Allen, developed BASIC language for personal computers• In 1975, they founded Microsoft to provide software for early PCs• Microsoft began providing operating system for IBM PCs • In 1985, released Windows, which became world’s most popular

operating system• In 1994, Gates founded charitable foundation for health, education

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• stock and bond• public company and private company• merger and conglomerate

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FranchisesKEY CONCEPTS

• Franchise—business that licenses the right to sell its products • Franchisee—pays fee to parent company to sell in a particular area • Fast-food restaurants are most common type of franchise

Franchises, Co-ops, and Nonprofits

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Franchises

EXAMPLE: An Almost Independent Business • After working as assistant manager, Tim wants to run own restaurant• Concerns: lacks enough experience, start-up funds• Likes organic juice and sandwich franchise; decides to apply

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Franchises

Advantages: Franchises • High level of independence• Franchiser provides training in running the business• Franchiser provides products and other materials at low cost• Franchiser pays for national and regional advertising

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Franchises

Disadvantages: Franchises• Franchisee must invest own money to start business• Must share some of the profits with franchiser• Does not have full control of business

– must buy only franchiser’s materials– must sell only franchiser’s products

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Cooperatives and Nonprofits

KEY CONCEPTS• Some businesses are not created to make a profit• Cooperative—operated for shared benefit of owners, who are

customers• Nonprofit organization—acts like business but purpose is to benefit

society

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A Business Organization for Its Members• Consumer co-ops keep prices low by purchasing in large volume

– members pay fee or provide labor as payment• Service co-ops, such as credit unions, provide services at low cost• Producer co-ops ensure cheaper, more efficient processing or

marketing

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A Purpose Other Than Profit• Purpose of many nonprofits is benefiting society

– include charities, professional associations, labor unions, museums

• Receive government charter; have unlimited life• Raise money from donations, grants, membership fees

– some sell services, products to raise funds to support their mission• Other nonprofits are professional organizations

– include professional associations, labor unions

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Give an example of each of the following terms:• franchise• cooperative• nonprofit organization

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Apple: The Evolution of One Company

Background• As students, Steve Jobs and Steve Wozniak created a personal

computer, and in 1976 formed Apple Computer, Inc. Through the years, Apple overcame problems and earned almost $14 billion in revenues in 2005.

What’s the Issue?• How does a company evolve from an idea into a billion-dollar

enterprise?

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Apple: The Evolution of One Company {continued}Thinking Economically

1. Based on information in the documents, how would you describe the evolution of Apple Computer, Inc.?

2. How did Apple’s advertising and marketing affect its success or failure? Use examples from the documents in your answer.

3. What single overriding concern has defined the evolution of Apple and determined its success? Use information from the documents to support your answer.

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