SECTIONSECTION 11

Chap. 8 Business Chap. 8 Business OrganizationsOrganizations

business organizationbusiness organization:: an establishment an establishment formed to carry on commercial enterprise.formed to carry on commercial enterprise.

3 basic ways to set up a business:3 basic ways to set up a business:

1.1. Sole ProprietorshipSole Proprietorship

2. Partnership2. Partnership

3. Corporation3. Corporation

SECTIONSECTION 22

Comparing / ContrastingComparing / Contrasting

We will look at each form in light of the following We will look at each form in light of the following criteria:criteria:

OwnershipOwnership (decision-making, satisfaction) (decision-making, satisfaction) Ease of startingEase of starting Financing growthFinancing growth Profits / LossesProfits / Losses (who gets what?) (who gets what?) Liability Liability (legal responsibility)(legal responsibility) TaxationTaxation Life of the businessLife of the business

33

Review: EntrepreneursReview: Entrepreneurs

Combine the factors of productionCombine the factors of production

1.1. landland

2.2. laborlabor

3.3. CapitalCapital

to create businesses…to create businesses…

11stst: a look at sole proprietorships: a look at sole proprietorships

SECTIONSECTION 44

A sole proprietorshipsole proprietorship is a business owned and managed by a single individual.

Sec. 1 Sole ProprietorshipsSec. 1 Sole Proprietorships

Sole proprietorshipsSole proprietorships (SP’s from now (SP’s from now on) are the most common form of biz on) are the most common form of biz organization (organization (75%75% of all biz are SP’s) of all biz are SP’s)

Most SP’s are small…many are Most SP’s are small…many are “mom ‘n pops” “mom ‘n pops”

All together, SP’s do only about All together, SP’s do only about 6% of all 6% of all US sales. US sales.

SECTIONSECTION 55

Characteristics of ProprietorshipsCharacteristics of Proprietorships Most sole proprietorships earn modest incomes.Most sole proprietorships earn modest incomes. Many proprietors run their businesses part-time.Many proprietors run their businesses part-time.

SECTIONSECTION 66

Advantages of Sole ProprietorshipsAdvantages of Sole Proprietorships

Ease of Start-UpEase of Start-Up small amount of paperwork small amount of paperwork

and legal expenses…. and legal expenses…. anyone can start a SPanyone can start a SP

Relatively Few RegulationsRelatively Few Regulations

least-regulated form of least-regulated form of business organization.business organization.

Sole Receiver of ProfitSole Receiver of Profit After paying taxes, the owner of After paying taxes, the owner of

SP keeps all the profits.SP keeps all the profits.

Full ControlFull Control Owners can run their Owners can run their

businesses as they wish. businesses as they wish.

Easy to DiscontinueEasy to Discontinue Besides paying off legal Besides paying off legal

obligations, such as taxes and obligations, such as taxes and debt, no other legal obligations debt, no other legal obligations need to be met to stop doing need to be met to stop doing business.business.

Sole proprietorships offer their owners many advantages:

SECTIONSECTION 77

The biggest disadvantage of sole proprietorships is

unlimited personal liability. LiabilityLiability is the legally bound obligation to pay debts.

Disadvantages of Sole ProprietorshipsDisadvantages of Sole Proprietorships

limited access to limited access to resourcesresources, such as , such as physical capital. Human physical capital. Human capital can also be capital can also be limited, because no one limited, because no one knows everything.knows everything.

lack permanencelack permanence… … When an owner closes When an owner closes shop due to illness, shop due to illness, retirement, or any other retirement, or any other reason, reason, the business the business typically ceases to existtypically ceases to exist..

SECTIONSECTION 88

Section 1 AssessmentSection 1 Assessment

1. 1. Any establishment formed to carry on commercial enterprises Any establishment formed to carry on commercial enterprises is ais a(a) partnership.(a) partnership.

(b) business organization.(b) business organization.

(c) sole proprietorship.(c) sole proprietorship.

(d) corporation.(d) corporation.

2. 2. Sole proprietorshipsSole proprietorships(a) are complicated to establish.(a) are complicated to establish.

(b) make up about 6 percent of all businesses.(b) make up about 6 percent of all businesses.

(c) are the most common form of business in the United States.(c) are the most common form of business in the United States.

(d) offer owners little control over operations.(d) offer owners little control over operations.

SECTIONSECTION 99

Section 1 AssessmentSection 1 Assessment

1. 1. Any establishment formed to carry on commercial enterprises is aAny establishment formed to carry on commercial enterprises is a(a) partnership.(a) partnership.

(b) business organization.(b) business organization.

(c) sole proprietorship.(c) sole proprietorship.

(d) corporation.(d) corporation.

2. 2. Sole proprietorshipsSole proprietorships(a) are complicated to establish.(a) are complicated to establish.

(b) make up about 6 percent of all businesses.(b) make up about 6 percent of all businesses.

(c) are the most common form of business in the United States.(c) are the most common form of business in the United States.

(d) offer owners little control over operations. (d) offer owners little control over operations.

SECTIONSECTION 1010

Sec. 2 PartnershipsSec. 2 Partnerships

Partnerships fall into three categories:Partnerships fall into three categories: General PartnershipGeneral Partnership

Partners equally share responsibility and liability.Partners equally share responsibility and liability. Limited PartnershipLimited Partnership

1 partner is the general partner 1 partner is the general partner (“GP”):(“GP”): he has unltd. he has unltd. personal liability for the firm. personal liability for the firm.

others are others are “limited partners”:“limited partners”: only liable for the $ or only liable for the $ or property they contribute…not actively involved in property they contribute…not actively involved in managing the businessmanaging the business

Limited Liability PartnershipLimited Liability Partnership Newer type of partnership…all partners are limited Newer type of partnership…all partners are limited

partners and typically DO take an active part in running the partners and typically DO take an active part in running the bizbiz

SECTIONSECTION 1111

Advantages of PartnershipsAdvantages of Partnerships

1. 1. Ease of Start-UpEase of Start-Uprecommended that partners develop recommended that partners develop articles of partnership.articles of partnership.

2. 2. Shared Decision Making and SpecializationShared Decision Making and SpecializationEach partner brings different strengths and skills to the business.Each partner brings different strengths and skills to the business.

3. 3. Larger Pool of CapitalLarger Pool of CapitalEach partner's assetsEach partner's assets, , or money and other valuables, improve the or money and other valuables, improve the firm's ability to borrow funds for operations or expansion.firm's ability to borrow funds for operations or expansion.

4. 4. TaxationTaxationIndividual partners are subject to taxes, but the business itself Individual partners are subject to taxes, but the business itself does not have to pay taxes (does not have to pay taxes (similarsimilar, but not , but not exactlyexactly the same as the same as SP).SP).

SECTIONSECTION 1212

Disadvantages of PartnershipsDisadvantages of Partnerships

At least one partner has unlimited liability.At least one partner has unlimited liability. General partners are bound by each General partners are bound by each

other’s actions.other’s actions. Potential for conflict…Potential for conflict…

Will partners agree about work habits, goals, Will partners agree about work habits, goals, management styles, ethics, and general management styles, ethics, and general business philosophies?business philosophies?

SECTIONSECTION 1313

Section 2 AssessmentSection 2 Assessment1. 1. What advantage does a partnership have over a sole What advantage does a partnership have over a sole

proprietorship?proprietorship?(a) The responsibility for the business is shared.(a) The responsibility for the business is shared.(b) The business is easy to start up.(b) The business is easy to start up.(c) The partners are not responsible for the business debts.(c) The partners are not responsible for the business debts.(d) The business is easy to sell.(d) The business is easy to sell.

2. How is a general partnership organized?2. How is a general partnership organized?(a) Every partner shares equally in both responsibility and (a) Every partner shares equally in both responsibility and

liability.liability.(b) The doctors, lawyers, or accountants who form a general (b) The doctors, lawyers, or accountants who form a general

partnership hire others to run the partnership.partnership hire others to run the partnership.(c) No partner is responsible for the debts of the partnership (c) No partner is responsible for the debts of the partnership

beyond his or her investment.beyond his or her investment.(d) Only one partner is responsible for the debts of the (d) Only one partner is responsible for the debts of the

partnership.partnership.

SECTIONSECTION 1414

Section 2 AssessmentSection 2 Assessment11. What advantage does a partnership have over a sole . What advantage does a partnership have over a sole

proprietorship?proprietorship?(a) The responsibility for the business is shared.(a) The responsibility for the business is shared.

(b) The business is easy to start up.(b) The business is easy to start up.

(c) The partners are not responsible for the business debts.(c) The partners are not responsible for the business debts.

(d) The business is easy to sell.(d) The business is easy to sell.

2. How is a general partnership organized?2. How is a general partnership organized?(a) Every partner shares equally in both responsibility and liability(a) Every partner shares equally in both responsibility and liability

(b) The doctors, lawyers, or accountants who form a general (b) The doctors, lawyers, or accountants who form a general partnership hire others to run the partnershippartnership hire others to run the partnership

(c) No partner is responsible for the debts of the partnership beyond (c) No partner is responsible for the debts of the partnership beyond his or her investmenthis or her investment

(d) Only one partner is responsible for the debts of the partnership(d) Only one partner is responsible for the debts of the partnership

SECTIONSECTION 1515

Sec. 3 Corporations, Mergers, & Sec. 3 Corporations, Mergers, & MultinationalsMultinationals

What types of corporations exist?What types of corporations exist? What are the advantages of incorporation?What are the advantages of incorporation? What are the disadvantages of What are the disadvantages of

incorporation?incorporation? How can corporations combine?How can corporations combine? What role do multinational corporations What role do multinational corporations

play?play?

SECTIONSECTION 1616

Types of CorporationsTypes of Corporations

A A corporationcorporation is a legal entity, or being, owned by is a legal entity, or being, owned by individual stockholders (aka “shareholders”).individual stockholders (aka “shareholders”).

Have many of the same rights as a person: Have many of the same rights as a person: - enter into contracts- enter into contracts

- can own property - can own property - can sue and be sued- can sue and be sued

StocksStocks, or shares, represent a stockholder’s portion , or shares, represent a stockholder’s portion of ownership of a corporation. of ownership of a corporation.

A corp. which issues stock to a limited a number of A corp. which issues stock to a limited a number of people is known as people is known as aa closely held corporation. closely held corporation. Public cannot buy shares of stock (ex: Serranos??).Public cannot buy shares of stock (ex: Serranos??).

A publicly held corporation A publicly held corporation buys and sells its stock buys and sells its stock on the open market (Microsoft, IBM, Exxon-Mobil). on the open market (Microsoft, IBM, Exxon-Mobil). Shares in these corps. can be bought by anyone.Shares in these corps. can be bought by anyone.

SECTIONSECTION 1717

Advantages of IncorporationAdvantages of Incorporation

Advantages for the Advantages for the StockholdersStockholders

Limited liabilityLimited liability:: extends ONLY to the extends ONLY to the corp. itself…Individual corp. itself…Individual investors or employees investors or employees have NO liability for the have NO liability for the corp’s actions. corp’s actions.

Shares of stock are Shares of stock are transferable: Shares transferable: Shares can be sold to others can be sold to others

Advantages for the Advantages for the CorporationCorporation

Potential for more Potential for more growth than other growth than other business forms.business forms.

Can borrow money by Can borrow money by selling bonds. selling bonds.

Can hire the best Can hire the best available labor / talentavailable labor / talent

Corporations have long Corporations have long lives (even if the #1 man lives (even if the #1 man dies, the corp. lives on)dies, the corp. lives on)

SECTIONSECTION 1818

Disadvantages of IncorporationDisadvantages of Incorporation

Difficulty and Expense of Start-UpDifficulty and Expense of Start-UpCorporate charters can be expensive and time consuming to Corporate charters can be expensive and time consuming to establish. A state license, known as a establish. A state license, known as a certificate of incorporationcertificate of incorporation,,

must be obtained.must be obtained.

Double TaxationDouble TaxationMust pay taxes on their income. Owners also pay taxes on Must pay taxes on their income. Owners also pay taxes on dividendsdividends, or the portion of the corporate profits paid to them., or the portion of the corporate profits paid to them.

Loss of ControlLoss of ControlManagers and boards of directors, not owners, manage Managers and boards of directors, not owners, manage corporations. corporations.

More RegulationMore RegulationCorporations face more regulations than other kinds of business Corporations face more regulations than other kinds of business organizations.organizations.

SECTIONSECTION 1919

When Corp’s. combine…When Corp’s. combine… Horizontal mergersHorizontal mergers combine two or more firms combine two or more firms

competing in the same market with the same good or competing in the same market with the same good or service.service.

Examples… Exxon Corp. + Mobil Corp. = Exxon Mobil CorporationExamples… Exxon Corp. + Mobil Corp. = Exxon Mobil Corporation

Vertical mergersVertical mergers combine two or more firms involved combine two or more firms involved in different stages of producing the same good or service.in different stages of producing the same good or service.

Examples…If Ford bought a small company that Examples…If Ford bought a small company that manufactures brakesmanufactures brakes

A A conglomerateconglomerate is a biz combination merging three or is a biz combination merging three or more businesses that make unrelated products.more businesses that make unrelated products.

Example… Gen’l. ElectricExample… Gen’l. Electric

SECTIONSECTION 2020

Multinational corporations (MNCs) are large corporations headquartered in one country that have

subsidiaries throughout the world.

MultinationalsMultinationals

Advantages of MNCsAdvantages of MNCs Creates jobs around the Creates jobs around the

world (but see world (but see benefit consumers by offering benefit consumers by offering

products worldwideproducts worldwide spread new technologies and spread new technologies and

production methods across production methods across the globe.the globe.

Disadvantages of MNCsDisadvantages of MNCs Critics are concerned Critics are concerned

about wages and working about wages and working conditions provided by conditions provided by MNCs in foreign countries. MNCs in foreign countries.

SECTIONSECTION 2121

Section 3 AssessmentSection 3 Assessment

1. All of the following are advantages of incorporation 1. All of the following are advantages of incorporation EXCEPTEXCEPT(a) the responsibility for the business is shared(a) the responsibility for the business is shared(b) capital is easier to raise than in other business forms(b) capital is easier to raise than in other business forms(c) corporations face double taxation(c) corporations face double taxation(d) corporations have more potential for growth(d) corporations have more potential for growth

2. A horizontal merger2. A horizontal merger(a) combines two or more firms involved in different stages of (a) combines two or more firms involved in different stages of

producing the same good or service.producing the same good or service.(b) combines two or more partnerships into a larger partnership.(b) combines two or more partnerships into a larger partnership.(c) combines two or more firms competing in the same market with (c) combines two or more firms competing in the same market with

the same good or service.the same good or service.(d) combines more than three businesses producing unrelated (d) combines more than three businesses producing unrelated

goods.goods.

SECTIONSECTION 2222

Section 3 AssessmentSection 3 Assessment

1. All of the following are advantages of incorporation 1. All of the following are advantages of incorporation EXCEPTEXCEPT(a) the responsibility for the business is shared(a) the responsibility for the business is shared(b) capital is easier to raise than in other business forms(b) capital is easier to raise than in other business forms(c) corporations face double taxation(c) corporations face double taxation(d) corporations have more potential for growth(d) corporations have more potential for growth

2. A horizontal merger2. A horizontal merger(a) combines two or more firms involved in different stages of (a) combines two or more firms involved in different stages of

producing the same good or service.producing the same good or service.(b) combines two or more partnerships into a larger partnership.(b) combines two or more partnerships into a larger partnership.(c) combines two or more firms competing in the (c) combines two or more firms competing in the

same market with the same good or service.same market with the same good or service.(d) combines more than three businesses producing unrelated (d) combines more than three businesses producing unrelated

goods.goods.

SECTIONSECTION 2323

A business franchisebusiness franchise is a semi-independent business that pays fees to a parent company in return for the

exclusive right to sell a certain product or service in a given area.

Sec. 4 Business FranchisesSec. 4 Business Franchises

Franchisers develop Franchisers develop products and business products and business systems, then local systems, then local franchise owners help to franchise owners help to produce and sell those produce and sell those

products.products.

Franchises allow Franchises allow owners a degree of owners a degree of control, as well as control, as well as support from the support from the parent company.parent company.

SECTIONSECTION 2424

Advantages and Disadvantages Advantages and Disadvantages of Business Franchisesof Business Franchises

Advantages of Business Advantages of Business FranchisesFranchises• Management training and Management training and

supportsupport• Standardized qualityStandardized quality

• National advertising National advertising programsprograms

• Financial assistanceFinancial assistance• Centralized buying powerCentralized buying power

Disadvantages of Disadvantages of Business FranchisesBusiness Franchises• High franchising fees and High franchising fees and

royaltiesroyalties• Strict operating standardsStrict operating standards• Purchasing restrictionsPurchasing restrictions• Limited product lineLimited product line

SECTIONSECTION 2525

A cooperativecooperative is a business organization owned and operated by a group of individuals for their shared benefit.

CooperativesCooperatives Consumer CooperativesConsumer Cooperatives

Service CooperativesService Cooperatives Producer CooperativesProducer Cooperatives

*See Sec. 4 for more info!*See Sec. 4 for more info!

SECTIONSECTION 2626

Nonprofit OrganizationsNonprofit Organizations

Professional Professional OrganizationsOrganizations. .

Business Business AssociationsAssociations

Trade AssociationsTrade Associations

Labor UnionsLabor Unions

Non-Profit Orgs: function like biz orgs, but do not operate for profits . Nonprofit orgs are exempt from federal income taxes.

SECTIONSECTION 2727

Section 4 AssessmentSection 4 Assessment

1. A business franchise1. A business franchise(a) attempts to improve the image and working conditions of people in a (a) attempts to improve the image and working conditions of people in a

particular occupation.particular occupation.

(b) operates without the aim of profit.(b) operates without the aim of profit.

(c) is a semi-independent business tied to a parent company.(c) is a semi-independent business tied to a parent company.

(d) is not required to pay income taxes.(d) is not required to pay income taxes.

2. Consumer cooperatives2. Consumer cooperatives(a) are owned and operated by consumers.(a) are owned and operated by consumers.

(b)(b)provide a service, rather than a good.provide a service, rather than a good.

(c)(c)help members sell their agricultural products.help members sell their agricultural products.

(d) pay no income tax.(d) pay no income tax.

SECTIONSECTION 2828

Section 4 AssessmentSection 4 Assessment

1. A business franchise1. A business franchise(a) attempts to improve the image and working conditions of people in a (a) attempts to improve the image and working conditions of people in a

particular occupation.particular occupation.

(b) operates without the aim of profit.(b) operates without the aim of profit.

(c) is a semi-independent business tied to a parent company.(c) is a semi-independent business tied to a parent company.

(d) is not required to pay income taxes.(d) is not required to pay income taxes.

2. Consumer cooperatives2. Consumer cooperatives(a) are owned and operated by consumers.(a) are owned and operated by consumers.

(b) provide a service, rather than a good.(b) provide a service, rather than a good.

(c) help members sell their agricultural products.(c) help members sell their agricultural products.

(d) pay no income tax.(d) pay no income tax.