CHAPTER 8 – TYPES OF BUSINESS ORGANIZATIONS

SECTION 1 – SOLE PROPRIETORSHIPS  Characteristics of Sole Proprietorships (single person owned business)  Every business begins with a person who has an idea about how to earn money and the drive to follow through on the idea and to create a business organization  The purpose of a business organization is to earn a profit by producing the goods and services that best meet consumers’ wants and needs  Business organizations provide jobs and income that can be used for spending and saving – they also pay taxes that help finance government services

ADVANTAGES OF SOLE PROPRIETORSHIPS  Easy to Open or Close  Easy to Open - needs funding, a license, a site permit, and a legally registered name  Easy to Close – be sure all bills are paid and close the business  Few Regulations  Lightly regulated (i.e. must locate his store in certain locations and must treat employees according to various labor laws  Freedom and Control  Owner makes all the decisions  Owner Keeps Profits  Owner gets to keep all the profits the business earns

DISADVANTAGES OF SOLE PROPRIETORSHIPS  Limited Funds  Owner is the only one putting in the money resources to keep the business open and prosper  Limited Life  A situation where a business closes if the owner dies, retires, or leaves for some other reason  Unlimited Liability  A business owners is responsible for all business’s losses and debts

SECTION 2 – FORMS OF PARTNERSHIPS  Partnership – a business co-owned by two or more partners who agree on how responsibilities, profits, and losses of that business are divided  General Partnership – partners share management of the business and each one is liable for all business debts and losses  Limited Partnership – at least one partner is not involved in the day-to-day running of business and is liable only for the funds he/she has invested  Limited Liability Partnership (LLP) – all partners are limited partners and not responsible for the debts and other liabilities of other partners

ADVANTAGES OF PARTNERSHIPS  Easy to Open and Close  Easy to Open - needs funding, a license, a site permit, and a legally registered name  Easy to Close – be sure all bills are paid and close the business  Few Regulations  Lightly regulated (i.e. must locate his store in certain locations and must treat employees according to various labor laws  Access to Resources  With more than one owner, easier to obtain resources to run the business (i.e. loans from banks)  Joint Decision Making  Each partner brings their own particular perspective to the process, which results in better decisions being made for the business  Specialization  Each partner brings specific skills to the business

DISADVANTAGES OF PARTNERSHIPS  Unlimited Liability  Both business owners are responsible for all business’s losses and debts  Potential for Conflict  Having more than one decision maker can often lead to disagreements between partners which can lead to the closing of the business  Limited Life  A situation where a business closes if the owner dies, retires, or leaves for some other reason

SECTION 3 – CORPORATIONS, MERGERS, MULTINATIONALS  Corporation - A business owned by stockholders, who own the rights to the company’s profits but face limited liability for the company’s debts and losses  Characteristics of Corporations  Owned by stockholders  Stockholders earn dividends (profit)  Limited liability

ADVANTAGES OF CORPORATIONS  Access to Resources  Loans from banks, selling more stock, issuing bonds  Professional Managers  Chief Executive Officer  Chief Operations Officer  Hire managers with strong backgrounds in finance and sales as company treasurer and vice president for sales  Limited Liability  A business owner’s liability for debts and losses of the business are limited  Stockholders are only responsible for the money they put in the company, not the whole company  Unlimited Life  A corporation continues to exist even after an owner dies, leaves the business, or transfers his/her ownership

DISADVANTAGES OF CORPORATIONS  Start-Up Costs and Effort  Setting up a corporation is more time-consuming, difficult, and expensive  Hire a law firm to help start up the corporation  Heavy Regulations  Must prepare annual reports for the Securities and Exchange Commission (SEC), a government agency that oversees the sale of stocks  Prepare and issue quarterly reports for their stockholders  Double Taxation  Taxes on the profits that the corporation must pay  Stockholders pay a tax on their dividends  Loss of Control  Founders, owners, and directors have a major voice in deciding the direction that the corporation goes

BUSINESS CONSOLIDATION  Horizontal Merger – the combining of two ore more companies that produce the same product or similar products  Vertical Merger – the combining of companies involved in different steps of producing or marketing a product

 Conglomerate – a business composed of several companies, each one producing unrelated goods or services  Multinational Corporation – large corporation with branches in several countries

SECTION 4 – FRANCHISES, CO-OPS, AND NONPROFITS  Franchise – a business that licenses the right to sell its products in a particular area  Advantages  Owner has a level of independence he/she did not have in their job  Provide good training in running the business  Provide proven products  Relatively low cost  Franchiser would pay for national or regional advertising that would bring in customers  Disadvantages  Invent a lot of money with no assurance of success in the business  Share some of the profits with the franchiser  No control over some aspects of the business

COOPERATIVES AND NONPROFITS  Cooperative – business operated for the shared benefit of the owners, who also are its customers  Consumer – consumer or purchasing co-ops can be small organizations (i.e. small organic food cooperative, giant warehouse clubs) that require a membership fee and keep prices low by offering discounts on large volumes of products/services  Service – service co-ops are business organizations (i.e. credit unions) that offer their members a service  Producer – producer co-ops are mainly owned and operated by the producers of agricultural products that join together to ensure cheaper, more efficient processing or better marketing of their products  Nonprofit Organization – business that aims to benefit society, not to make a profit