Ch. 8: Business Organizations

Business Brainstorm Think of your business, would you want to own it by yourself, or with others? – What are the pros/cons of each option? – If shared ownership, in what structure?

Section 1: Sole Proprietorships Small, family-owned businesses have long served as the foundation to America’s economy.

Business Organization A business organization is any establishment formed to carry on commercial activity.

Liability vs. Rewards Liability is the legal obligation to pay bills and take responsibility for something. Rewards are the benefits/profits received from businesses. – We will categorize businesses according to who is liable/rewarded for them.

Sole Proprietorship A sole proprietorship is a business owned and managed by a single individual.

Sole Proprietorship Owners of sole proprietorships hold all of the liability & benefits of the business. – A majority of the businesses in America (75%) – Account for a minority of the total sales (6%)

Start-Up Sole proprietorships are relatively easy to start. Most require minimal legal requirements.

Legal Requirements Business License: Authorization from local government Site Permit: certificate of occupancy for a building (if not based at home) Name: businesses must register their name Zoning Laws: Cities and towns designate separate areas for different uses.

Advantages and Disadvantages Sole responsibility: Requires a high degree of initiative and energy – Receive all rewards (profits) – Responsible for all liability (potential loss)

Section 2: Partnerships A partnership is any business organization owned by two or more people who divide ownership (responsibility, and profit/liability)

General Partnership Partners in general partnership share equally in both responsibility and liability.

Limited Partnership Only one partner is required to have unlimited personal liability. One or more partners may be limited. – They do not actively manage the business. – Can only lose the amount of money the invested.

Limited Liability Partnership (LLP) Recognized by many states, all partners have limited liability in the event of extreme mistakes or problems. – Attorneys, physicians, dentists, accountants

Advantages of Partnership Relative ease of start-up Shared decision making and responsibility Specialization: each partner may have different strengths Larger pools of capital/assets

Disadvantages of Partnerships Unlimited liability – Unless an LLP, at least one partner has unlimited liability Potential for conflict – Minority owner can get run over

Section 3: Corporations, Mergers, and Multinationals Increasingly, American business is controlled by large, multinational corporations.

Corporations A corporation is a legal entity owned by individual stockholders who face limited liability for the firm’s debt.

Stock Corporations are owned by anyone with stock in the company. Stock is a certificate of ownership in a company.

Private Corporations (closely held) Some corporations are incorporated, but only issue stock to select people. Stock is rarely traded and is often held within families.

Publicly Trade Corporations Publicly held corporations are traded on the open market (Ex: New York Stock Exchange). Anyone can buy shares in a publically traded company.

Advantages of Incorporation Limited liability Easily transferable ownership Ability to attract large amounts of capital Long life

Disadvantages of Incorporation Expense and difficulty of start-up Double taxation Potential loss of control by founders More requirements and regulations

Horizontal Mergers Horizontal mergers are when two companies competing in the same market merge together. Chrysler + Daimler-Benz = DaimlerChrysler

Vertical Merger Vertical mergers combine two or more firms involved in different stages of producing the same good. Owning the natural resource mining, transportation, and manufacturing of the a product.

Conglomerates Conglomerates merge more than three businesses that make unrelated products. – Kraft Foods – Time Warner – Coca-Cola

Multinational Conglomerates Multinational conglomerates operate and sell all of the world. – Coca Cola CEO: "We are not an American company. We are an international company that happens to be based in Atlanta, Georgia."

Section 4: Other Organizations Franchises, nonprofit organizations, and cooperatives are other forms of business structures.

Business Franchise A franchise is a semi-independent business that pays fees to a parent company in exchange for using their brand.

Advantages to Franchises Management training and support Standardized quality National advertising/brand recognition Financial assistance Centralized buying power

Disadvantages of Franchises Franchising fees and royalties Strict operating standards Purchasing restrictions Limited product line Summary: Limited freedom

Cooperative Organizations A cooperative is a business owned and operated by a group of individuals for shared benefit. Example: Farm cooperative

Nonprofit Organizations Nonprofits operate like businesses, but do not operate to generate a profit. Education, hospitals, social work agencies, Churches, YMCAs, museums, etc.

Professional and Business Organizations Professional organizations are resources for a given occupation – National Education Association, American Medical Association Business Associations are resources for local businesses – Better Business Bureau