Chapter Seven Business Organization
The Three Types of Business Organization SSole Proprietorship PPartnerships CCorporations
Sole Proprietorship If you alone own and control the service.
Opportunity Benefits of Sole Proprietorships Owner has direct control Small initial investment Owner receives all profits Owner can dissolve business when necessary.
Opportunity Costs of Sole Proprietorships All losses are borne by owner Difficulty in raising financial capital Limited growth potential Only one person in authority Lack of longevity Unlimited liability
Partnerships A business owned and controlled by two or more people.
REMEMBER! Partnerships don ’ t have to be just two people. JC Penney: The man with a thousand partners.
Two forms of partnerships General Partnerships: Equal decision making. Limited Partnerships: Partners join as investors, offering capital, but little, if any, role in decision making. VENTURE CAPITALISTS
Advantages of Partnerships Two or more individuals own the business. Specialization Losses are shared by partners. More money is available to invest in business Sharing management responsibilities Taxes are shared by partners
Disadvantages of Partnerships Division of authority Unlimited liability. Difficulty in raising additional capital. Lack of longevity. Legal complications when there is a change in ownership.
Advantages of Corporations Limited liability. Easy to raise needed capital. Business owned by a group of individuals. Responsibilities for running the business divided among many individuals Easy change in ownership and business continues as long as it makes profits. – LONGEVITY.
Disadvantages of Corporations Corporate charters are $$$ Federal and state govts. monitor corporations more. ***Slow process of decision making.
Corporations Legally distinct from their owners and treated as if individuals. Corporations can Own property Hire workers Make contracts Pay taxes Sue and be sued Make and sell products.
What kind of companies are organized as corporations? USUALLY – food, steel, oil companies are corporations. Insurance companies, supermarket chains, major companies.
Forming a corporation When expansion calls for more than adding more partners. GET A LAWYER!
Forming a corporation: Lawyer applies for a state license: ARTICLES OF INCORPORATION. Reviewed by state officials. If all in order they grant CORPORATE CHARTERS
Corporate Structure The corporate charter identifies the officers. Chairman of the board – symbolic head of the corporation. CEO – Chief Executive Officer – the REAL power.
Corporate Structure Board of Directors – people from inside or outside the company. Key decision making body. Decide on product lines. Hires / fires corporate officers to do the day-to- day running of the corporation. Sees that boards policies are carried out.
Corporate Finances Most common way to raise money is selling STOCK. STOCK – represents ownership of the firm. Ownership is issued in portions called SHARES.
Corporate finances If you buy 100 shares of stock in a company, you own 100 pieces of that company. If that company has a total of 10,000 shares available – you own 1% of the company.
Why own stock? DIVIDENDS – profits on your investment. PREFERRED STOCK – guarantees dividends. COMMON STOCK – potential for dividends.
Why own stock? SOMETIMES can make more money for you. The “ fun ” of being involved with a corporation or a product.
Benefits for stockholders Flexibility of ownership. Limited liability. Can ’ t be sued for corporate problems. If the corporation folds, you only lose what you invested. Private assets can ’ t be seized.
The trade-off Common stock ownership allows a “ voice ” on how the company is run. Preferred stock does not.
IMPORTANT ADVICE TO FUTURE CORPORATE HEADS!!! ALWAYS hold or directly control 51% of your company ’ s stock. OR have a lack of control at annual shareholder meetings. You can lose your job!
Other disadvantages! If you own stock, corporate profits are taxed twice. You pay taxes as being a member of the corporation. You pay taxes on the profits / dividends you take.
The corporation raises money If there are thousands of shareholders, there is enormous amounts of money through the sale of stock. eBay has 6,643,058 shares available.
Other ways corporations raise $$. Corporate bonds. You loan your money to the company. You DO NOT own the company. Repaid the principal and the interest. Principal – the actual money borrowed. Interest – the price you gave to that principal.
Example of Corporate Bonds You hold a 1 year $1,000 bond. At the end of the year you are paid back the $1,000 principal AND the 5% ($50) interest.
Corporate Combinations Most corporations seek to expand. Build new facilities Legally combines with another enterprise. MERGERS!
Three types of Mergers (corporate combinations) Horizontal Vertical Conglomerate
Horizontal Combination Buying up companies involved in the same industry. THINK STANDARD OIL – John D. Rockefeller.
Horizontal combinations All the companies merging do the same thing. Standard Oil: all the companies Rockefeller bought, processed oil into gas.
Vertical Combination A merger between two or more companies involved in different production phases of the same good or service. THINK US STEEL / Andrew Carnegie.
Conglomerate Combinations. Merger of companies producing unrelated products. Subsidiaries. Started in the 1960s.
B ERKSHIRE H ATHAWAY INC. Acme Brick CompanyJohns Manville Ben Bridge JewelerJordan's Furniture Benjamin Moore & Co.Justin Brands Berkshire Hathaway GroupLarson-Juhl Berkshire Hathaway Homestates Companies McLane Company Borsheim's Fine Jewelry MidAmerican Energy Holdings Company Buffalo NEWS, Buffalo NYMiTek Inc.
Borsheim's Fine Jewelry MidAmerican Energy Holdings Company Buffalo NEWS, Buffalo NYMiTek Inc. Central States Indemnity CompanyNational Indemnity Company Clayton HomesNebraska Furniture Mart CORT Business ServicesNetJets® CTB Inc.The Pampered Chef® Fechheimer Brothers CompanyPrecision Steel Warehouse, Inc. FlightSafetyRC Willey Home Furnishings Fruit of the Loom®Scott Fetzer Companies Garan IncorporatedSee's Candies GEICO Direct Auto InsuranceShaw Industries General ReStar Furniture Helzberg Diamonds United States Liability Insurance Group H.H. Brown Shoe GroupWesco Financial Corporation International Dairy Queen, Inc.XTRA Corporation
GEICO Direct Auto Insurance Shaw Industries General ReStar Furniture Helzberg Diamonds United States Liability Insurance Group H.H. Brown Shoe Group Wesco Financial Corporation International Dairy Queen, Inc. XTRA Corporation
Opportunity Benefits of Combinations Efficiency – centralized decision making. Potential lower costs. Easier to acquire financial capital.
Opportunity Costs of Combinations Can lead to unemployment (don ’ t need to double the jobs) Reduced competition in the market place. MONOPOLIES.
Franchises One company agrees – for a fee – to let another person or group set up a FRANCHISE. Have to uphold the reputation of the parent company. Get training and advertising.
Cooperatives Co-ops – businesses owned by their members. Membership gives privileges.
Cooperatives
Nonprofit Organizations Does not focus on financial gain and profits. Business organization but pursues other goals. Income isn ’ t taxed.
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