C hapter 7 Business Ownership and Organization: Proprietorships, Partnerships, and Corporations © 2002 South-Western

2 Economic Principles Sole Proprietorships Partnerships Corporations Unlimited and Limited Liability

3 Economic Principles Stockholders (Shareholders) Stocks and Bonds International and Multinational Corporations

4 Business Ownership and Organization Businesses can be categorized into three main types: Proprietorships. Partnerships. Corporations.

5 Business Ownership and Organization These types of businesses differ based on who owns the business and how the business is organized.

6 Business Ownership and Organization There are advantages and disadvantages associated with each of these types of businesses.

7 Sole Proprietorship Sole proprietorship A firm owned by one person who alone bears the responsibilities and unlimited liabilities of the firm.

8 Sole Proprietorship In order to set up a sole proprietorship, owners usually rely on their own financial means to purchase, rent, or hire physical plant, raw materials, and labor.

9 Sole Proprietorship Sole proprietorships hire principally, but not exclusively, family labor.

10 Sole Proprietorship Most sole proprietorships produce for local markets.

11 Sole Proprietorship Sole proprietors have unlimited liability.

12 Sole Proprietorship Unlimited liability Personal responsibility for all debts incurred by the business. The owners’ personal wealth is subject to appropriation to pay off the firm’s debt.

13 Sole Proprietorship 1. What might be some advantages of sole proprietorships? Personal independence for the proprietor. A focus on local markets. A lack of bureaucratic structure. Access to familiar or even family labor.

14 Sole Proprietorship 2. What is an important disadvantage of sole proprietorships? Sole proprietors have unlimited liability.

15 Partnership Partnership A firm owned by two or more persons who each bear the responsibilities and unlimited liabilities of the firm.

16 Partnership By coupling finances between two or more partners, the productive capacity of the business can be increased.

17 Partnership These increases in productive capacity may not have been possible under the sole proprietorship form of business.

18 Partnership Decisions are made jointly in a partnership.

19 Partnership Each partner is still personally liable for all of the debts incurred by the business.

20 Partnership 1. What are some advantages of partnerships? Shared responsibility among the partners. Greater access to capital. Potential for increases in productive capacity.

21 Partnership 2. What are the disadvantages of partnerships? Decisions are made jointly and may be challenged by the other partners.

22 Partnership 2. What are the disadvantages of partnerships? Each partner may be liable for 100 percent of the debts incurred by the business -- regardless of the size of the investment in the business.

23 Corporation Corporation A firm whose legal identity is separate from the people who own shares of its stock.

24 Corporation Stockholder or shareholder A person owning stock in a corporation.

25 Corporation A corporation is recognized as an independent person through a state charter.

26 Corporation Like any other legal person, corporations are subject to the laws of the state, have the right to organize for business and can sue and be sued.

27 Corporation The liability of each stockowner in a corporation is limited only to what he or she has invested in the firm.

28 Corporation What are the major disadvantages of corporations? One disadvantage is double taxation. Both the owners and the corporation itself pay taxes on the same corporate income.

29 Corporation What are the major disadvantages of corporations? Another disadvantage, from the stockholders’ point of view, is that stockholders exercise corporate control only theoretically. Management is in a much stronger position to actually control the corporation.

30 EXHIBIT 1U.S. CEO-TO-WORKER PAY RATIO

31 Corporation What are the major disadvantages of corporations? A third disadvantage is the threat of corporate takeover. An outsider may decide to buy up enough common stock to own the corporation outright.

32 Corporate Stock Stock Ownership in a corporation represented by shares that are claims on the firm’s assets and earnings.

33 Corporate Stock Dividends The part of a corporation’s net income that is paid out to its stockholders.

34 Corporate Stock There are a variety of kinds of stock that a corporation can issue. Three examples include: Common stock. Preferred stock. Convertible stock.

35 Corporate Stock 1. What is common stock? Stockholders vote and receive dividends in proportion to the quantity of stock they own. Dividend returns are not fixed.

36 Corporate Stock 2. What is preferred stock? Carries no voting privileges. Has a fixed dividend yield. Has prior claims on dividends over common stock.

37 Corporate Stock 3. What is convertible stock? Carries no voting privileges. Yields a fixed dividend. Has prior claims on dividends over common and preferred stock. Gives stockholders the privilege of converting their stock to common stock.

38 Corporate Bonds Corporate bonds A corporate IOU. The corporation borrows capital for a specified period of time in exchange for this promise to repay the loan along with an agreed-upon rate of interest.

39 US Business Organization There is great diversity throughout the US in terms of business organization.

40 US Business Organization One can find on almost every square inch of the economic landscape almost every form of business organization.

41 US Business Organization Each of the three forms of business organization have been growing over the years, both in terms of number of businesses and receipts (or dollars) generated by the businesses.

42 US Business Organization There is a disparity between the number of businesses, and the volume of business, however.

43 US Business Organization While partnerships dominate the current economic landscape in terms of number, corporations dominate in terms of volume of business.

44 EXHIBIT 2PROPRIETORSHIPS, PARTNERSHIPS, AND CORPORATIONS: 1970–96 (000s AND $BILLIONS) Source: Bulletin, Statistics of Income, Summer 1992, Internal Revenue Service, Washington, D.C., pp. 161–163; Statistical Abstract of the United States, 1999, Department of Commerce, Washington, D.C., p. 545.

45 Exhibit 2: Proprietorships, Partnerships and Corporations: How were firms organized in terms of number in the U.S. in 1996? There were almost 17 million proprietorships, representing 75 percent of the total number of operating businesses.

46 Exhibit 2: Proprietorships, Partnerships and Corporations: How were firms organized in terms of number in the U.S. in 1996? Corporations came in second with over 4.5 million.

47 Exhibit 2: Proprietorships, Partnerships and Corporations: How were firms organized in terms of number in the U.S. in 1996? Partnerships represented the smallest segment, with close to 1.7 million.

48 Exhibit 2: Proprietorships, Partnerships and Corporations: How do firms compare in terms of volume of business in the U.S. in 1993? Corporations clearly dominated with over $11.8 trillion, or 89.5 percent of receipts.

49 Exhibit 2: Proprietorships, Partnerships and Corporations: How do firms compare in terms of volume of business in the U.S. in 1993? Proprietorships came in second with $757 billion, or 5 percent of total receipts.

50 Exhibit 2: Proprietorships, Partnerships and Corporations: How do firms compare in terms of volume of business in the U.S. in 1993? Partnerships brought in only $627 billion.

51 EXHIBIT 3SIZE OF CORPORATION AND CORPORATE RECEIPTS, 1996 (000s AND $BILLIONS) Source: Statistical Abstract of the United States, 1999, Department of Commerce, Washington, D.C., p. 545.

52 Exhibit 3: Size of Corporation and Corporate Receipts The disparity that exists between numbers of businesses and volume of business exists within the corporate ranks, as well.

53 Exhibit 3: Size of Corporation and Corporate Receipts 3.79 billion corporations with receipts under $1 million make up 82 percent of all of the corporations.

54 Exhibit 3: Size of Corporation and Corporate Receipts These corporations account for only 5.2 percent of total receipts, however.

55 Exhibit 3: Size of Corporation and Corporate Receipts The 22,000 corporations with receipts over $50 million account for 68.6 percent of total corporate receipts.

56 EXHIBIT 4NUMBER AND CHARACTERISTICS OF STOCKHOLDERS: (000s) Source: Shareownership 1997, New York Stock Exchange, 1998, p. 59. Data are for 1992.

57 Exhibit 4: Numbers and Characteristics of Stockholders: 1992 Who were stockholders in the U.S. in 1992? 70 percent of stockholders had some college education.

58 Exhibit 4: Numbers and Characteristics of Stockholders: 1992 Who were stockholders in the U.S. in 1992? Over 55 percent of stockholders earned more than $50,000 per year.

59 Exhibit 4: Numbers and Characteristics of Stockholders: 1992 Who were stockholders in the U.S. in 1992? About 50 percent of stockholders were 44 years old or younger.

60 EXHIBIT 5SIZE DISTRIBUTION OF STOCK PORTFOLIOS Source: Shareownership 1997, New York Stock Exchange, 1998, p. 59. Data are for 1992.

61 Exhibit 5: Size Distribution of Stock Portfolios: 1992 The distribution of stock ownership is highly skewed. A small number of shareholders own a large percentage of shares.

62 Exhibit 5: Size Distribution of Stock Portfolios: percent of the shareholders in 1992 owned over 80 percent of the stock.

63 Indirect Stock Ownership Some people own stock indirectly through pension plans, life insurance policies, and other financial intermediaries.

64 Indirect Stock Ownership These indirect stock owners are not accounted for in regular tallies of stock owners.

65 Indirect Stock Ownership If indirect stockowners were accounted for, it is reasonable to argue that corporate stocks are held by, or on behalf of, a vast majority of the US population.

66 International and Multinational Corporations International corporation A corporation whose production facilities are located in one country, but whose exports to other countries overshadow its domestic trade.

67 International and Multinational Corporations Multinational corporation A corporation whose production facilities are located in two or more countries. Typically, multinational corporations are also international.

68 International and Multinational Corporations What is a possible disadvantage of multinational corporations? It becomes increasingly difficult for individual national governments to regulate large multinational firms.

69 EXHIBIT 6FOREIGN REVENUES AS A PERCENTAGE OF TOTAL REVENUES AND FOREIGN ASSETS AS A PERCENTAGE OF TOTAL ASSETS FOR THE TEN LARGEST U.S. MULTINATIONALS: 1985 AND 1999 Source: Forbes, July 29, 1985, and July 24, Reprinted by permission of Forbes Magazine © Forbes, 1985 and 2000.

70 Exhibit 6: Foreign Revenues as a Percentage of Total Revenue and Foreign Assets as a Percentage of Foreign Assets for the 10 Largest US Multinationals Four of the top ten multinational corporations in 1999 were either oil or automobile corporations.

71 Exhibit 6: Foreign Revenues as a Percentage of Total Revenue and Foreign Assets as a Percentage of Foreign Assets for the 10 Largest US Multinationals Exxon/Mobil draws a large percentage of its total revenues from foreign operations.