Business Organization

General Information Business firm—an organization that brings together the factors of production for the purpose of producing or distributing goods and services 80% of total production comes from private businesses Firms must pass the market test Specialization and division of labor Risk Can group businesses by industry or legal form of organization

Sole Proprietorship Definition Business firm owned by a single individual or married couple who makes all of the decisions and receives all of the profits Most common type nearly 80% of all businesses Represent about 6% of business receipts Most businesses start as sole proprietorships

Advantages of Sole Proprietorships Easy and inexpensive to create Owner receives all profit Owner has complete discretion Owner personally knows customers and employees Minimal government regulation Usually pays less income tax than other business forms

Disadvantages of Sole Proprietorships Unlimited liability Limited fundraising ability Limited life Owner may lack special skills and abilities

How to Set Up A Sole Proprietorship http://www. citmedialaw Prepare a business plan Decide on a business name and register it Obtain local licenses Business license-legal document that allows one to operate a business http://www01.smgov.net/finance/licenses/pdf/BusinessLicenseInformationHandout.pdf http://www01.smgov.net/finance/licenses/pdf/Application.pdf Determine tax and regulatory obligations and apply for EIN Open bank account Other considerations Zoning laws—where one can legally locate a business

Partnerships Form of business organization that is collectively owned by two or more people who jointly make business decisions, share the profits and bear financial responsibility for the loss Only about 9% of businesses, about 4% of all business receipts

Partnerships General Partners Limited Partners Limited Liability Partnership Uniform Partnership Act Joint Venture Strategic Alliance

Advantages of Partnerships Inexpensive/easy to create General partners have complete control Skills/abilities can be pooled Improved credit position Less tax burden than corporations Elimination of competition Continuity of business Profits split between partners

Disadvantages of Partnerships Unlimited liability Partners must share profits Disagreements among partners Each partner is bound by the contracts of the others If partner dies, partnership ends Difficulty withdrawing from partnership

Making a Partnership Work Partners should…. Share business responsibilities Put everything in writing Always be honest about how the business is doing Establish a partnership agreement in advance to establish guidelines about profit sharing, business responsibilities, and what happens if a partner dies/wants to quit

Corporations Businesses that are registered or chartered by a state Roughly 20% of firms, but account for 90% of business receipt Articles of incorporation a written application requesting permission to form a corporation Charter the legal authorization to organize a business as a corporation

Corporations Closely Held Corporation limited number of shareholders Publicly Held Corporation stock owned by members of the general public and openly traded Multinational Corporation firm managed from one country, but derives roughly 25% of its revenue from operations outside of its home country Conglomerate corporation made up of several different firms that supply diverse products (Hyundai)

Corporate Structure Corporate Structure Video http://www.investopedia.com/video/play/corporate-structure

Advantages of Incorporation Fundraising ability Limited liability Unlimited life Specialized management Risks of business are spread among many owners

Disadvantages of Incorporation More difficult/expensive to start Owners have less direct control Double taxation (profits and then as shareholder’s dividend income) Limited to activities stated in articles of incorporation

Financing a Corporation Bonds certificate stating the amount the corporation has borrowed from the holder of the bond and the term of repayment Stockshare of ownership in a corporation Common stockgives owners voting rights, capital appreciation, dividends (quarterly) Preferred stock guaranteed dividends and first to be paid dividends Explain startup money for most proprie

Advantages of Multinationals Gaining a strong foothold into the international market (volume) Ability to take advantage of cheaper factor, location and distribution costs Tax incentives Access to new technologies and methodsresearch and development

Disadvantages of Multinationals Trade restrictions Taxes or tariffs imposed on imports from other countries Limited quantities (quotas) of imports Management problems

Comparison Sole Proprietorship Partnership Corporation Start-Up Costs Liability Continuity of Business Control of Business Distribution of Profits Transfer of Interest

Business Franchise The right to sell a good or service within an exclusive market Franchise royalties: money paid by the franchisee to the franchisor to cover the franchisor’s overhead costs (education, training, branding etc.)

Advantages of Franchises High likelihood of success given name recognition. Franchisee seen as less risky of a borrower High level of training and support provided by franchise company Franchise company provides national level advertising (franchisee avoids some of this cost)

Disadvantages of Franchises Can be costly to implement depending on royalty payments established by franchise agreement Limited creativity in effort to maintain brand. Attention to detail a must.

Other Organizations Cooperative Consumer Cooperative Service Cooperative Producer Cooperative Nonprofit Organization Professional Organization

Mergers

Mergers Types Horizontal Vertical Conglomerate

The Federal Trade Commission (FTC) Established in 1914 Evaluates potential mergers Identifies anti-competitive behavior Promotes competition in key industries Provides information to consumers

Competition Wealth of Nations Free markets guided through competition in a way that individuals, acting in their self interest, will be led to achieve what is best for society Economic efficiency if waste occurs, firm loses part of profit Firms do not make excessive profit Consumers benefit from lower prices and higher quality