Business Organizations Chapter 8. Sole Proprietorships Business organization is an establishment formed to carry on a commercial enterprise Sole Proprietorships.

Business OrganizationsChapter 8

Sole ProprietorshipsBusiness organization is an

establishment formed to carry on a commercial enterprise

Sole Proprietorships Are the most common type of

business organizationManaged by a single individualThat person earns all profits, is

responsible for all of the firms debts

Sole Proprietorships Advantages

A. Easy to start up- small amount of paperwork and legal expense 1. obtain a business license 2. Obtain a site permit for physical business 3. Register business name

B. Relatively few regulations Least regulated form of business Subject to health codes, zoning laws

C. Sole receiver of profit Owner keeps all profits after taxes

D. Full Control Owner can run business as they wish Can respond quickly to changes in the marketplace

E. Easy to discontinue After all debts and obligations paid there are no other legal obligations to

business

Sole Proprietorships Disadvantages

A. Biggest disadvantage is liability (legally bound obligation to pay debts)

Sole proprietors are personally responsible for all business debts (unlimited liability)

B. Limited access to resources Difficult to expand business Hard to acquire funding and loans from banks Hard to find employees- can’t offer security,

advancement or fringe benefits of larger business organizations

C. Lack of permanence Has a limited life Death, retirement, loss of interest by owner business

ceases to exist

Partnerships A business owned by two or more persons who agree on a specific

division of responsibility Three different types of partnerships

I. General Partnership All partners share equally in responsibility and liability

II. Limited Partnership Only one partner has unlimited personal liability for the firms actions Other partners do not actively run business Limited partners can only lose initial investment

III. Limited Liability Partnerships New type of business organization All partners protected from liability in certain situations

Partnerships AdvantagesA. Ease of start-up

Written partnership agreements called articles of partnership spell out each partners rights and responsibilities

Uniform Partnership Act uniform state law adopted by most states that establish rules for partnerships

1. Requires common ownership interest

2. Profit and loss sharing

3. Shared management responsibilities

B. Partnerships are subject to few government regulations

C. Shared decision making Each partner bring different strengths and skills to the business

D. Larger pool of capital More assets improve the ability to expand business and borrow funds Easier to attract employees

E. Taxation Partners pay taxes only on their profits

PartnershipsDisadvantages

A. Unlimited liability, except in LLP or LP

In LP general partner has unlimited liability

B. Lack of absolute control

C. Potential for conflict between partners

Corporations, Mergers and Multinationals

Most complex form of business organization Corporation is a legal entity Owned by individual stockholder, each stockholder has limited

liability for firm’s debts Stock is a share of ownership in a corporation Corporation is considered a legal entity

It pays taxes Engages in business Makes contracts Can sue other parties, and get sued

Two types of corporations Closely held corporations stock held by a few people Stock rarely traded Publicly held corporations Many shareholders Stocks bought and sold on the open market (stock exchanges)

All corporations have the same basic structureA. Stockholders elects a board of directors to make major decisions

for the for corporation

B. Board hires professional managers to run day to day business

Corporations, Mergers and Multinationals

Advantages of Incorporation Limited liability to owners

Individual investors do not responsible for corps. actions, lose only money they have invested in business

Transferrable ownership Stockholders can sell stocks to others

Ability to attract capital Easier to grow company Can sell stocks to raise capital Can sell bonds (a formal contract to repay borrowed money at a

fixed rate at intervals) Long life

Company outlasts original owners, can do business indefinitely

Corporations, Mergers and Multinationals

Disadvantages of Corporations Difficult and expensive to set up

Must file for state corporate charter (certificate of incorporation)

Double Taxation Corporations are legal entities and need to pay taxes on

their income Stockholders also pay taxes on their dividends (portion

of corporate profits paid to stockholders) When stockholders sell their stock pay a tax called

capital gains tax if they make a profit Loss of control

Professional managers don’t always act in the best interest of the company

More regulation Must hold annual meetings for shareholders Publically traded companies required to make annual

reports to the Securities Exchange Commission

Corporations, Mergers and Multinationals

Corporate Combinations Companies combine with other companies to create larger

more efficient firms Can sell goods at a lower price

Three types of mergers Horizontal Merger

Two or more companies that compete in the same market and provide the same good or service

Try to improve efficiency, reduce costs and boost revenue Monitored closely by the federal government so they do not create

a monopoly Vertical Merger

Companies involved in different stages of producing good or service

New firm can control all phases of production Typically do not lessen competition

Conglomerate Buy companies that produce unrelated goods Have more that three businesses that produce unrelated products One business earns a majority of the firms profits

Corporations, Mergers and Multinationals

Multinational Corporations Produce goods throughout the world Operate in more than one country at a time Must obey laws and pay taxes in all countries

where they operate Many have operating budgets bigger than most

governments Advantages

Provide jobs Spread technology Help poorer nations improve their standard of living

Disadvantages Have too much influence over culture and politics in

countries where they operate Working conditions are poor

Other OrganizationsBusiness franchiseSemi independent business that

pays fees to parent company In return it has the exclusive right

to sell a certain product in a given area

Franchiser (parent company) develops products and works with local franchise to produce and sell product Allows owners a degree of control

and owners benefit from support of parent company

Other OrganizationsAdvantages

A. Come with a built in reputation

B. Management and training support

C. Standardized quality owners follow certain rules and processes to guarantee product quality

D. National advertising

E. Financial assistance

F. Centralized buying power buy materials in bulk to keep costs down

Disadvantages

G. High franchising fees and royalties Royalties are a share of earnings

B. Strict operating standards Must follow all rules in the franchise agreement

C. Purchasing restrictions

D. Limited product line can only sell approved products

Other OrganizationsCooperatives Business owned and operated by a

group of individuals for their shared belief Three categories Consumer Cooperatives (purchasing

cooperatives) Sell merchandise to their members at

reduced prices Make large purchases in bulk to obtain

goods at a lower cost Service Cooperatives

Provide a service at a discounted price Producer cooperatives

Help members sell their products (usually agricultural products)

Other Organizations Nonprofit Organizations

Business that does not operate for a profit

Usually tries to benefit society Exempt from income taxes Some operate with partial government

support Almost all provide services rather than

goods Professional Organizations

Improve image, working conditions, set codes of conduct and skill of people in particular occupations

Labor Unions Organized group of workers Attempt to improve working conditions,

wages and fringe benefits