Chapter 3 Business Organizations

Sole Proprietorship A business that is owned and managed by one individual who receives all the profits and bears all the losses. Most common form of business organization BUT the smallest in size. Most numerous and profitable

Partnerships A business that is owned and managed by two or more individuals who receive all the profits and bear all the losses. Numerous among business organizations Second smallest proportion of sales and net income General- –All partners are responsible in management and finances Limited- –One partner is NOT active in daily business but gave money to start the business Articles of partnership: documents that spell out how the partners divide up the profits or loses

Corporations A business that is owned and operated by stockholders and has rights and responsibilities as if it were a person 90% of all businesses Organized and recognized by law Can buy, sell, enter into contracts, and be sued Harder to start – need permission from the government –Includes details about Stock ownership

Common Stock Represents basic ownership of a corporation Stock holders receive voting rights No dividend received Both: Ownership certificates in a corporation Purchased by investors called stockholders or shareholders Provide ownership rights Preferred Stock Dividend guaranteed Stock holders receive no voting rights Stockholders receive dividend before common stockholders receive theirs SH: receive investment back before common SH

Benefits of the Three Sole Proprietorship –Easy to start –Ease of management –Control over profits –Personal freedom –Lower taxes –Ease of closing the business –Psychological benefits: own your own business Partnership –Easier to raise financial capital (through bank loans or new partner) –Ease of management –Partners may combine managerial skills –Lower taxes –Easier to attract qualified workers Corporation –Limited Liability –Greater financial capital – stocks, bonds –Unlimited life –Specialized management –Easy transfer of ownership

Cost of the Three Sole Proprietorship –Unlimited liability – owner responsible for all losses and debts –Difficulty in raising financial capital –Difficulties hiring (qualified) personal/stock enough inventory –Management knowledge may be limited –Limited Life/stops existing with death or owner or owner sells the business Partnership –Unlimited liability –Shared profits –Possible conflicts between partners –Limited life Corporation –Ownership and management are separated/shareholders have little say in running the business –Increased taxation –Difficulty in starting –Increased governmental control

Government and Business Regulations Federal and state regulate interest rates and utility rates State may offer industrial development bonds to help industries –Relocate or tax credits to draw investors

Business Growth and Expansion

Growth through Reinvestments Business revenue can be used for –Investment in factories –Machinery –Technologies Before reinvestments: –Must estimate its cash flow. –First records its total sales and then subtracts all expenses, taxes, and depreciation = net income –Net income + depreciation = cash flow (or the bottom line) real measure of business profit. Decide to reinvest part of cash flow or additional sales and more profits

Growth Through Mergers Firms merge, one gives up it separate legal identity Company may merge with another to –Grow faster –Become more efficient –Acquire or deliver a better product –Eliminate a rival –Change its image

Growth Through Mergers Horizontal mergers: joining of firms that make the same product (Nextel and Sprint) Vertical Merger: joining of firms involved in different stages of manufacturing or marketing

Growth through Mergers Conglomerate: composed of four or more businesses –Marketing unrelated products –None are responsible for a majority of sales Multinational: corporation with manufacturing and service operations in several countries –Subject to each nation’s business regulations

Other Organizations

Community and Civic Organizations Nonprofit Organization: business to promote its members’ collective interest, not seek financial gain (Bill Gates foundations) –Incorporate to take advantage of a corporation’s unlimited life and limited liability –If money remains after expenses are paid, the B.O.D. may apply to other projects

Cooperatives Voluntary association of people who carry on an economic activity that benefits its members –Consumer Cooperatives: buy food and other necessities in bulk Members donate time to the co-op Members pay lower prices for goods –Service Co-ops: credit unions, offer services to its members at lower rates –Producer Co-ops: help members, farmers, promote or sell their products

Labor, Professional, and Business Organizations Labor unions: represent workers’ interest and negotiate with management through collective bargaining Professional association set standards for those in the profession and influence government policies on issues concern members’ interest (NCSS) Business Associations: industries or trade associations that represent specific businesses (BBB)

Government Direct Role –Agencies produce and distribute goods and services to consumers such as the TVA (electricity) or US Postal Service Gov’t Corp: –Board of directors –Congress’ money v. investors’ money Indirect Role: –Regulates public utilities –Grants money to people in form of Social Security and student financial aid