Business Organizations

Learning Objectives Distinguish between different types of business organizations State the advantages and disadvantages of different types of BO

Types of Firms Sole proprietorship – a business owned and run by one person. In 2000, 73% of all businesses in the U.S. were sole proprietorships. Advantages of sole proprietorships: -easy start-up -flexible (can make decisions quickly)  management is all you -the profits are yours -you are your own boss -no business taxes; all income for you -easy exit  pay your bills and stop working

Disadvantages of sole proprietorships -unlimited liability  you are responsible for everything -it’s hard to borrow money - Size and efficiency—you have to do everything yourself. You may be good at some things (making the product) but not at others (keeping the financial records, doing the insurance paperwork) -limited management experience -hard time finding qualified employees -limited life – business dies when you die

Discussion With your partner, discuss the advantages and disadvantages of sole proprietorship

Partnerships Partnerships – business jointly owned by two or more persons. In 2000, partnerships accounted for 7.1% of business organizations in the U.S. There are two types of partnerships: *general partnerships – all partners actively run the business *limited partnership – at least one partner is not active in running the business and has limited responsibility for the debts & obligations of the business.

Warning  You are responsible for the debts of your partners! Forming a Partnership It’s sort of like getting a marriage pre-nup. Legal papers are drafted that specify: -how profits are divided. -how new partners may join. -how property is divided if the partnership ends. Warning  You are responsible for the debts of your partners!

Advantages of partnerships: -easy to start -easy to manage -you get your share of the profits -can attract financial capital easier than sole proprietorships -larger, so some economies of scale present  More efficient operations (people can specialize) -easier to attract qualified employees

Disadvantages of partnerships: -responsible for the acts of all the other partners -if you are a limited partner, not involved in daily activity, you only lose your original investment - limited life  when a partner dies or leaves, it ends. It must be dissolved legally and reorganized with the remaining partners. (They usually want to keep the old name.) -conflict between partners -bankruptcy – if you’re not a limited partner, you have to pay any debts!

Discussion With your partner, discuss the advantages and disadvantages of Partnership

Corporations Corporation – a form of business organization that is recognized by the law as having all the legal rights of an individual. They have the right to buy & sell property, enter into legal contracts, and to sue & be sued. In 2000, corporations were 19.9% of business organizations, but were responsible for 88.8% of all sales.

Corporations Forming a Corporation: Corporate Structure: File for permission from the federal (national) government or the state where your HQ will be “charter” is granted: states name, address, purpose, number of shares of stock, etc. Sell stock (“IPO”) at an initial price Stock value goes up and down according to your profitability Issue dividends (hopefully) Corporate Structure:

Stock? Stock – a certificate of ownership in a firm. Stockholders – a.k.a. – shareholders – investors in a corporation (they own stock). The money from the stockholders (investors) is used to set up the firm. This money is called financial capital.

Types of Stock Common stock – basic form of ownership in a corporation. Each share is worth one vote for the board of directors, who run the company. Preferred Stock – non-voting shares of stock, but these shareholders receive profits before common stockholders.

Figure 3.3 Ownership, Control, and Organization of a Typical Corporation

Advantages of Corporations Easy to raise financial capital 1.) sell stock 2.) issue bonds  a written promise to repay the amount borrowed in the future Hire professional managers Limited liability for the corporation’s owners: the corporation itself is responsible for all debts, not the owners. If it goes out of business, stockholders do not have to repay the corporation’s debts. Unlimited life – the firm doesn’t die when a shareholder does.

Advantages of Corporations Ease of transferring ownership:  If you don’t want to be part owner any more, you just sell your stock.  Much easier than a sole proprietorship trying to find someone to buy the entire business.

Disadvantages of Corporations Difficult to start Shareholders have little say about how the business is run Double taxation – the firms profits are taxed and then the profit that is distributed to shareholders is also taxed. Subject to government regulation.

Disadvantages of Corporations Corporations are subject to more government regulation than sole proprietorships and partnerships.  register with the state  register with the Securities & Exchange Commission—the SEC—to sell stock to the public  publish info on their sales and profits on a regular basis  get approval to buy or merge with other companies.

Discussion With your partner, discuss the advantages and disadvantages of corporations.

The Role of Government The state governments began regulating corporations in the mid-1800’s. Corporations in states with a lot of regulation moved to states with less, so as a result state regulations began to be lifted. In the early 1900’s, consumer groups demanded regulation of giant corporations. Regulations of electric companies, insurance companies, the phone company, and transportation companies (Railroads & Airlines)

Nonprofits Firms use scarce resources to produce goods and services in order to make a profit for their owners. Other organizations operate on a “not-for-profit” basis A nonprofit organization operates like a business to promote the collective interests of its members rather than to seek financial gain for its owners

Nonprofits Examples: schools, churches, hospitals, welfare groups, and adoption agencies. Many of these organizations are legally incorporated to take advantage of unlimited life and limited liability. They are similar to profit-seeking businesses, but do not issue stock, pay dividends, or pay income taxes. The profits they produce are used to further the goals of the group.

Goal of Cooperatives Cooperative - a voluntary association of people formed to carry on some kind of economic activity that will benefit its members. Producer and worker cooperatives are associations in which the members join in production and marketing and share the profits.

Cooperatives The consumer cooperative is a voluntary association They buy bulk amounts of goods such as food and clothing on behalf of its members. The goal is lower prices for members.