CHAPTER 3: BUSINESS ORGANIZATIONS Section One: Forms of Business Organization

I. Forming a Proprietorship  Easiest form of business to start-needs only the occasional licenses and fees  Ease of start up  Relative ease of management  Decisions can be made quickly

Proprietorship Advantages  Owner enjoys the PROFITS of successful management without having to share  No separate business income taxes  Not recognized as a separate legal entity  Owner must pay individual income taxes on profits  Business is exempt from any tax on the income  Psychological satisfaction  Easy to get out of business

Proprietary Disadvantages  Unlimited liability  Owner is personally and fully responsible for all loses and debts of the business  If business fails, the owner’s personal possessions may be taken away to satisfy business debts  Difficult to raise capital  Personal financial resources are limited  Size and efficiency: Inventory is any unused stock of finished goods/parts in reserve

Proprietary Disadvantages  Limited Managerial Skills  Difficulty of attracting qualified employees  Fringe benefits- Employee benefits such as vacation, sick leave, retirement, medical, and health insurance may not be available  Limited lifespan: The firm legally ceases to exist when the owner dies, quits, or sells the business

II. Partnerships  Owned by 2 or more persons  Least numerous business organization  Smallest proportion of sales and net income

Types of Partnerships  General Partnership: All partners are responsible for the management and financial obligations of the business.  Limited Partnership: At least one partner is not active in the daily running of the business, although he or she may have contributed funds to finance the operation  Ex.

Forming a Partnership  Relatively easy to start  Articles of Partnership: Formal legal papers which specify arrangements between partners

Advantages of Partnerships  Ease of start up.  Articles of Partnership involves attorney fees and filing fee for the state.  Ease of management: Each partner usually brings different areas of expertise to the business.  Lack of special taxes: Partners draw profits from the firm and then pay individual income taxes at the end of the year

Advantages of Partnerships  Usually attract financial capital more easily than a sole proprietorship  Slightly larger size = greater efficiency  Lawyers, doctors, accountants  Usually attract top talent to their organizations

Disadvantages of Partnerships  Unlimited Liability: Each partner is fully responsible for the acts of all partners  Limited Partnership: The limited partner has limited liability  Investor’s responsibility for the debts of the business is limited by the size of their investment in the firm  If business fails with a large debt, the limited partner (investor) only loses their original investment, leaving the general partners to make up the rest

Disadvantages of Partnerships  Limited Life: When a partner leaves or dies, the partnership must be dissolved and reorganized.  The new partner may try to keep an agreement to keep its name  Potential for Conflict: “Why can’t we all just get along?”

III. Corporations  Defn: A form of business organization recognized by law a a separate legal entity having all as an individual.  Can buy & sell property  Enter into legal contracts and sue and be sued  Account for 1/5 of the firms in the US  Account for 90% of all sales  Ex: dex.html dex.html

Forming a Corporation  Very formal and legal arrangement  Incorporation (or forming a corporation) must file for permission from the state where business will have be headquartered  Charter: A government document that gives permission to create a corporation if approved  States the company name, address, purpose of business, and the number of shares of stock, or ownership certificates, within the firm

Forming a Corporation, continued  Shares of stock are sold to investors called…  stockholders, or shareholders.  $$ is then used to set-up corporation (remember “Tucker” DVD)  A check, or dividend, is paid to shareholders if the corporation is profitable

Corporate Structure: Common Stock  Investors become owners with certain ownership rights, depending on type of stock purchased:  Common Stock: Basic ownership of corporation  Owner usually receives 1 vote for each share of stock  Used to elect board of directors who direct the corporation’s business by setting policies/goals  The Board hires a professional management team to run the business on a daily basis

Common Stock  The dividend is variable and common stock shareholders are the last to receive a dividend or get their $$ back if corporation fails.

Preferred Stock  Nonvoting ownership shares of a corporation  These shareholders receive dividends first and they are fixed  If there are funds or property left after a business fails, preferred stockholders get their investment back first!  Preferred stockholders cannot elect the board of directors-THEY CANNOT VOTE!!

Advantages of the Corporation  Ease of raising financial capital  Need more capital?  Sell additional stock  Borrow $$ by issuing bonds: Written promise to repay the amount borrowed at a later date  Principal: Amount borrowed to be repaid later  Interest: The price paid by the corporation for the use of another’s $$

Advantages of the Corporation  Ease of finding professional managers  Limited liability for its owners  Corporation is fully responsible for its debts and obligations  **Because limited liability is so attractive, many firms incorporate just to take advantage of it

Advantages of the Corporation  Unlimited life: Corporation continues to exist even when ownership changes  Because the corporation is a legal entity, the name of the company remains the same, and the corporation continues to do business  Ease of transferring ownership: If a shareholder no longer wants to be an owner, they can sell the stock

Disadvantages of the Corporation  Difficult to get a charter  Depending on the state, attorneys’ fees and filing expense can cost several thousand $$  Owners/shareholders have little say in business affairs after voting for board of directors  Double Taxation: Corporate profits  Stockholders’ dividends are taxed twice: once as corporate profit and again as personal income

Disadvantages of the Corporation  Lots of Government regulation:  Register with state where the Corp. is chartered  To sell stock to the public, the Corp. must register with the Securities and Exchange Commission  Provide detailed financial statements on regular basis to the general public  When taking over another business, the Corp may require federal approval

Government and Business Regulation  Business Regulation: In the 20 th century, various consumer groups demanded regulation of giant corporations.  Federal and state governments responded by passing stronger regulations.  Rigorous regulations for banks, insurance companies, electricity, telephone, and transportation  Ex?, Sherman and Clayton Anti-trust Acts, FDIC, Federal Reserve, FCC, Dept. of Transportation

Government and Business Regulation  Business Development: States try to attract new industry. Offer tax credit or a reduction in taxes for a business to move to a state  Examples in TX? 