Chapter 8 Business Organizations

FORMS OF BUSINESS ORGANIZATIONS: 1. Sole Proprietorship 2. Partnership 3. Corporation

Section 1 Sole Proprietorships

A sole proprietorship is a form of business organization in which the business firm is owned and managed by a single individual who:  makes all business decisions  receives all profits earned  is responsible for any losses incurred by the firm SOLE PROPRIETORSHIP

75 % of American businesses However, they only generate about 6% of the total sales in the country Ex. barber, bakery, bike shop

Advantages and Disadvantages: + PROS CONS easy start-up owner gets all profits proprietor is their own boss unlimited liability* limited ability to raise funds less likely to get a bank loan limited life lack of fringe benefits** few regulations ex. zoning laws** and health codes easy to discontinue (shut down) **Fringe benefit: payment other than money Ex. Health insurance/paid vacation *Liability: the legally bound obligation to pay debts Authorization/business license* Site permit (C/O) Business name *business license: authorization from local gov't **zoning laws: laws in a city or town that designates separate areas for residency and for business

Section 2 Partnerships

form of business ownership that is owned by two or more people partners share profits, losses and decision-making least common type of business in the U.S. some use a partnership agreement (aka: articles of partnership)

Types of Partnerships  General Partnership  Limited Partnership  Limited Liability Partnership (LLP) responsibility/liability is shared equally among partners only ONE partner required to have unlimited liability general partner controls the business, others give $ all partners are limited partners -> protected against each other's mistakes

+ PROS CONS easy (and relatively inexpensive) to start up shared decision making specialization in management better fund-raising ability (use of each partners assets*) limited life (job lasts only as long as the partnership) unlimited liability (asset: money or other valuables belonging to an individual or business) potential conflict (except for LLP)

Section Three: Corporations, Mergers and Multinationals

Corporation: a legal entity owned by individual stockholders ex. super markets, big box stores

Corporations 20% of all U.S. business but do 90% of the sales Generate 70% of net income in the U.S. Their profit is usually about 10% of their income

Two Types of Corporations: Closely held corporations/Privately held corporations 1.few people are stockholders (usually family members) Publicly held corporations 1.stock is bought and stock on the open market / stock exchanges 2.they are usually run by a Board of Directors 3.Board of Directors makes all of the major decisions and they appoint corporate officers

Advantages and Disadvantages: + PROS CONS less likely to get a bank loan * limited liability - stockholders can only lose the amount they paid for the stock * transferable ownership * easy to gain capital - through bonds: a formal contract to repay borrowed money with interest at fixed intervals or through further stock sales. *long life * high start- up costs / difficult process / certificate of incorporation : license from state * double taxation - corporation income and stockholders must pay taxes on their dividends (portion of profits paid to stockholders) * more legal requirements and regulations

Mergers / Corporate Combinations 1. Horizontal Merger: Combining two or more firms in the same market Example: Chrysler and Daimler - Benz 2. Vertical Merger: Combining two or more firms in different stages of producing the same good or service Example: iron producers and railroads 3. Conglomerates: Combining three or more firms that make unrelated products Example: cereal maker and toothpaste and razors

Multinational Corporation (MNC) A firm which sells its goods and services througout the world or at least in more than one nation. Example: Wal- Mart In the 1990s there were: 63,000 MNCs, 690,000 branches, $3 trillion in assets

Advantages and Disadvantages: + PROS CONS less likely to get a bank loan * provide jobs and products around the world * spread technology * help poorer nations * influence culture / politics *often times take advantage of the poor

Section Four: Other Organizations

Franchise Semi- independent business that pays fees to a parent company. The business receives exclusive rights to sell a good or service in a given area. Example: Curves and McDonald's

Advantages and Disadvantages: + PROS CONS less likely to get a bank loan * training and support * standardized quality * advertising *financial assistance * centralized buying power * owner sacrifices freedom * franchise fees / royalties: share of earnings paid to the franchiser * strict operating standards * purchasing restrictions *limited product line

Cooperative Organizations / Co- ops A business organization owned by a group of individuals for a shared benefit. There are three types: 1. Consumer Co-op: operated by consumers so they can get products cheaper Example: CD or DVD club 2. Service Co-op: offer services rather than products Example: credit union or health care 3.Producer Co-op: agricultural marketing co-op that helps members sell their products

Non Profit Organizations Similar to a business organization but they do not operate to generate profit. Usually benefit society Example: Museum, Red Cross Pay no income taxes

Four Types of Non Profit Organizations 1.Professional Organization: A non profit organization that works to improve the image, working conditions and skill level of people in a particular occupation. Example: ADA, ABA 2.Business Association: Promotes collective business interest for a certain area. Example: BBB, Chamber of Commerce 3.Trade Association: Promotes interest of a particular industry Example: corn growers (high fructose corn syrup commericals) 4.Labor Unions: Promotes better working conditions, hours, wages, and benefits