Types of Business Organizations

The Characteristics of Sole Proprietorships KEY CONCEPTS Business organizations—produce goods, provide services purpose of most is to earn profit supply most products in market economy; provide jobs, income; pay taxes Sole proprietorship—owned and managed by single person Make up 70 percent of U.S. businesses, but generate only 5 percent of all sales

Sole Proprietorships: Advantages and Disadvantages Advantages: Sole Proprietorships Easy to open or close as long as owner settles all bills Must meet few regulations; possibly zoning, labor laws for employees Owner makes own decisions, controls business; personal satisfaction Owner keeps all profits

Sole Proprietorships: Advantages and Disadvantages Disadvantages: Sole Proprietorships Have limited funds, especially at start-up Have limited life —close if owner dies, retire, or leaves business Have unlimited liability—owner personally responsible for all debts Hard to attract qualified employees

Mary Kay Ash: Going It Alone Building a Business Ash decided to create business that would reward working women Mary Kay, Inc. sells cosmetics, other products at in-home parties In first year, 1964, sales exceeded $198,000 Incentives to consultants include pink Cadillacs, diamond jewelry In 2005, 1.6 million consultants in 30 countries had $2 billion sales

The Characteristics of Partnerships Forms of Partnerships The Characteristics of Partnerships Partnership—business co-owned by two or more people partners agree on division of responsibilities, profits, and losses Found in all areas of business very common in professional and financial services

The Characteristics of Partnerships Type 1: General Partnerships General partnership—most common type Partners share responsibilities, profits, debts, losses equally partnership agreement can specify otherwise

The Characteristics of Partnerships Type 2: Limited Partnerships Limited partnership—at least one limited partner not involved in running business liable only for funds he or she invested Must have general partner who runs business, is liable for all debts money for business comes from limited partners

The Characteristics of Partnerships Type 3: Limited Liability Partnerships Limited liability partnership (LLP)—all partners are limited not responsible for liabilities of other partners Not all businesses can register as LLPs only those in which malpractice can be an issue

Partnerships: Advantages and Disadvantages Advantages: Partnerships Easy to start up and dissolve Few regulations: legal agreement; Uniform Partnership Act (UPA) More funds means easier to get loans, attract employees Joint decision making: partners bring different perspectives Partners can specialize, promoting efficiency

Partnerships: Advantages and Disadvantages Disadvantages: Partnerships Unlimited liability partners risk personal savings and property to cover debts Potential for conflict if many partners must agree on decisions Limited life—if partner leaves or joins new agreement must be drawn

Characteristics of Corporations Corporations, Mergers, and Multinationals Characteristics of Corporations Corporation—business owned by stockholders (many owners) Stock—shares of ownership in a corporation Dividend—part of a corporation’s profit paid out to stockholders Public company—issues stock that can be freely bought and sold Private company—controls who can buy or sell its stock Bond—contract issued by corporation promises to repay borrowed money, plus interest on fixed schedule

Corporations: Advantages and Disadvantages Can raise money in various ways: borrowing from banks, selling more stock, issuing bonds Professional managers likely to produce higher profits Limited liability—stockholders, directors, officers protected Unlimited life—business operates as before if stockholders change

Corporations: Advantages and Disadvantages Starting up: time-consuming, difficult, expensive; paperwork, lawyers Heavy regulation, specially for public companies annual SEC reports, quarterly financial reports, stockholder meetings Both profits and dividends taxed; some small corporations excluded Decisions made by board; founders must give up some control

Business Consolidation KEY CONCEPTS To increase efficiency, gain new identity, keep rivals out, diversify Horizontal merger—joins companies with same or similar product Vertical merger—joins different steps of production, marketing Conglomerate—combines 4+ companies with unrelated products Multinational corporation—has branches in several countries

Business Consolidation Mergers In 2005, Reebok and Adidas made horizontal merger meant to cut production, distribution costs by combining operations purpose to undersell and take customers from Nike In 1990s, Shell and Texaco made vertical merger Shell had more refineries; Texaco more gas stations for distribution

Business Consolidation Conglomerates Theory: diversified businesses protect parent company Practice: difficult to manage unrelated companies 1960s Gulf and Western in communications, clothes, mines, food eventually sold all except entertainment, publishing; became Viacom

Business Consolidation Multinational Corporations Multinational, or transnational, corporations increase globalization Benefits: provide jobs, products; spread technology; pay taxes help raise standard of living of poor countries In countries with lax regulations, factories may cause problems pollution, long work hours, unsafe conditions

Bill Gates: Entrepreneur and Corporate Leader Microsoft Corporation With Paul Allen, developed BASIC language for personal computers In 1975, they founded Microsoft to provide software for early PCs Microsoft began providing operating system for IBM PCs In 1985, released Windows, which became world’s most popular operating system In 1994, Gates founded charitable foundation for health, education

Franchises, Co-ops, and Nonprofits Franchise—business that licenses the right to sell its products Franchisee—pays fee to parent company to sell in a particular area Fast-food restaurants are most common type of franchise

Franchises Advantages: Franchises High level of independence Franchiser provides training in running the business Franchiser provides products and other materials at low cost Franchiser pays for national and regional advertising

Franchises Disadvantages: Franchises Franchisee must invest own money to start business Must share some of the profits with franchiser Does not have full control of business must buy only franchiser’s materials must sell only franchiser’s products

Top 50 Franchises for 2011 http://www.entrepreneur.com/franchises/rankings/franchise500-115608/2011,-1.html

Cooperatives and Nonprofits Some businesses are not created to make a profit Cooperative—operated for shared benefit of owners, who are customers Nonprofit organization—acts like business but purpose is to benefit society Examples: schools, churches, Goodwill, etc.

Cooperatives and Nonprofits A Business Organization for Its Members Consumer co-ops keep prices low by purchasing in large volume members pay fee or provide labor as payment Service co-ops, such as credit unions, provide services at low cost Producer co-ops ensure cheaper, more efficient processing or marketing

Cooperatives and Nonprofits Purpose of many nonprofits is benefiting society include charities, professional associations, labor unions, museums Receive government charter; have unlimited life Raise money from donations, grants, membership fees some sell services, products to raise funds to support their mission Other nonprofits are professional organizations include professional associations, labor unions