Business Organizations Simple to Complex

Types of Firms Sole proprietorship – a business owned and run by one person. Ray Kroc – McDonalds started as a sole proprietor mortgaging his home to purchase franchise rights from small Southern California McDonalds brothers Advantages of sole proprietorships: -easy start-up -flexible (can make decisions quickly)  management is all you -the profits are yours -you are your own boss -no business taxes; all income for you -easy exit  pay your bills and stop working

Disadvantages of sole proprietorships -unlimited liability  you are responsible for everything -it’s hard to borrow money (again Ray Kroc) - Size and efficiency—you have to do everything yourself. -limited management experience -hard time finding qualified employees -limited life – business dies when you die

Partnerships Partnerships – business jointly owned by two or more persons. In 2000, partnerships accounted for 7.1% of business organizations in the U.S. There are two types of partnerships: *general partnerships – all partners actively run the business *limited partnership – at least one partner is not active in running the business and has limited responsibility for the debts & obligations of the business.

Forming a Partnership It’s sort of like getting a marriage pre-nup. Legal papers are drafted that specify: -how profits are divided. -how new partners may join. -how property is divided if the partnership ends. Warning Warning  You are responsible for the debts of your partners!

Advantages of partnerships: -easy to start -easy to manage -you get your share of the profits -can attract financial capital easier than sole proprietorships -larger, so some economies of scale present  More efficient operations (people can specialize) -easier to attract qualified employees

Disadvantages of partnerships: -responsible for the acts of all the other partners -if you are a limited partner, not involved in daily activity, you only lose your original investment - limited life  when a partner dies or leaves, it ends. It must be dissolved legally and reorganized with the remaining partners. (They usually want to keep the old name.) -conflict between partners -bankruptcy – if you’re not a limited partner, you have to pay any debts!

Famous Partnerships Kinko’s – now FedEx Kinko was started and grew as a partnership by founder Paul Orfalea. Orfalea, who gave the store its name from his nickname – he had curly hair, created partnerships throughout the country with others that wanted to operate Kinko’s as a franchise Purchased by Federal Express in 2004

Corporations Corporation – a form of business organization that is recognized by the law as having all the legal rights of an individual. They have the right to buy & sell property, enter into legal contracts, and to sue & be sued. In 2000, corporations were 19.9% of business organizations, but were responsible for 88.8% of all sales.

Corporations Forming a Corporation: File for permission from the federal (national) government or the state where your HQ will be “charter” is granted: states name, address, purpose, number of shares of stock, etc. Sell stock (“IPO”) at an initial price Stock value goes up and down according to your profitability Issue dividends (hopefully) Corporate Structure:

Stock? Stock – a certificate of ownership in a firm. Stockholders – a.k.a. – shareholders – investors in a corporation (they own stock). The money from the stockholders (investors) is used to set up the firm. This money is called financial capital.

Figure 3.3 Ownership, Control, and Organization of a Typical Corporation

Advantages of Corporations Easy to raise financial capital 1.) sell stock 2.) issue bonds  a written promise to repay the amount borrowed in the future Hire professional managers Limited liability for the corporation’s owners: the corporation itself is responsible for all debts, not the owners. If it goes out of business, stockholders do not have to repay the corporation’s debts. Unlimited life – the firm doesn’t die when a shareholder does.

Advantages of Corporations Ease of transferring ownership:  If you don’t want to be part owner any more, you just sell your stock.  Much easier than a sole proprietorship trying to find someone to buy the entire business.

Disadvantages of Corporations Difficult to start Shareholders have little say about how the business is run Double taxation – the firms profits are taxed and then the profit that is distributed to shareholders is also taxed. Subject to government regulation.

Disadvantages of Corporations Corporations are subject to more government regulation than sole proprietorships and partnerships.  register with the state  register with the Securities & Exchange Commission—the SEC—to sell stock to the public  publish info on their sales and profits on a regular basis  get approval to buy or merge with other companies.

“Limited Liability Company” LLCs - “Limited Liability Company”  The major advantage of a Sole Proprietorship is no double taxation. Its owner just calculates her profits and reports them as her income, and pays income taxes.  The major disadvantage of a Sole Proprietorship is its Unlimited liability.  For instance, if someone slips and falls in her Sole Proprietorship, the injured person could sue her for the business assets, her home, and other personal assets of the proprietor.

“Limited Liability Company” LLCs - “Limited Liability Company” Forming your company as an LLC instead of a Sole Proprietorship keeps the major advantage and loses the disadvantage: it keeps single taxation but limits the liability of the owners for losses and debts of the company. Forming your company as an LLC instead of a Sole Proprietorship keeps the major advantage and loses the disadvantage: it keeps single taxation but limits the liability of the owners for losses and debts of the company. For instance, if a client slips and falls on the property of an LLC, the injured person can only sue for assets that belong to the company (not the proprietor’s personal assets). For instance, if a client slips and falls on the property of an LLC, the injured person can only sue for assets that belong to the company (not the proprietor’s personal assets). Sole Proprietors can also take out “liability insurance” in case of accident or injury. Sole Proprietors can also take out “liability insurance” in case of accident or injury.