1. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Forms of Business Ownership and Organization

2. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Most Businesses are Small Businesses What is a Small Business? A firm that is independently owned and operated, not dominant in its field, and meets industry- specific size standards for income or number of employees. 98 percent have fewer than 100 employees Over 14 million people in the U.S. are earning business income without any employees Almost half the sales in U.S. are made by small businesses 5-2

3. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Most Businesses Are Small Businesses Most non-farming small businesses have been concentrated in retailing in the service industries Typical Small-Business Ventures Dentists Home Builders Florists, etc Almost half of small businesses in the U.S. are home based businesses (firms operated from the residence of the business owner) 5-3

4. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. David vs. Goliath: Business Sectors Most Dominated and Least Dominated by Small Firms 5-4

5. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Major Industries Dominated by Small Businesses 5-5

6. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Contributions or Small Business to the Economy Creating New Jobs Creating New Industries Attracting New Industries 5-6

7. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Advantages of a Small Business Small businesses differ greatly in: Forms of organization Market positions Staff capabilities Managerial styles Organizational structures Financial resources These differences usually seem like advantages to small-business owners 5-7

8. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Advantages of Small-Business Ownership 5-8

9. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Advantages of a Small Business Innovation Example: Start-up business to offer online bookstore shopping and delivery. Typically develop twice as many product innovations per employee as larger firms Also obtain the more patents per sales dollar than larger businesses Key innovations developed by small businesses include the airplane, audio tape recorder, double- knit fabrics, optical scanner, PC, soft contact lenses, and the zipper 5-9

10. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Advantages of a Small Business Lower Costs Example: Small retailer who can prepare sales flyers on a PC. Small firms may be able to provide goods and services at prices that large firms cannot match Overhead costs are usually minimized Typically, organizations are lean -- with the smallest staffs and few support personnel 5-10

11. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Advantages of a Small Business Superior Customer Service Example: Free alterations on clothing purchases from a small boutique. Small firms can operate with greater flexibility This allows tailoring of product lines and services to the needs of customers 5-11

12. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Advantages of a Small Business Filling Isolated Niches Example: Retail store that specializes in selling products designed for left-handed consumers. Large businesses tend to focus on the large segments of the overall market Growth prospects of market niches are too limited, and expenses involved in serving them to great, for large firms This creates opportunity for small firms 5-12

13. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Disadvantages of a Small Business In addition to being vulnerable to economic downturns, primary disadvantages include: Management Shortcomings Inadequate Financing Government Regulation 5-13

14. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 5-14

15. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Disadvantages of a Small Business Management Shortcomings People often go into business with little, if any, business training Owners often hesitate to turn to consultants for advice in areas were they lack knowledge or experience Frequently struggle with “rose-colored-glasses syndrome” 5-15

16. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Disadvantages of a Small Business Inadequate Financing Too often, new business owners assume a that they will generate enough funds in the first few weeks or months to finance continuing operations Provisions must be made for uneven cash flows Banks often very reluctant to make small business loans 5-16

17. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Sources of Small-Business Financing 5-17

18. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Disadvantages of a Small Business Government Regulation Small-business owners often complain bitterly of excessive government regulation and red tape Paperwork costs account for billions of small-business dollars each year Taxes are another burdensome expense for small businesses 5-18

19. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Alternatives for Organizing a Business Sole Proprietorships Sole proprietor—form of business ownership in which the company is owned and operated by one person. 5-19

20. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Alternatives for Organizing a Business Partnerships Partnership—form of business ownership in which the company is operated by two or more people who are co-owners by voluntary legal agreement. 5-20

21. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Alternatives for Organizing a Business Corporations Corporations—business that stands as a legal entity with assets and liabilities separate from those of its owner(s). S corporations 5-21

22. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Double Taxation: A Disadvantage of the Corporate Form of Organization 5-22

23. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Alternatives for Organizing a Business Changing Legal Structures to Meet Changing Needs Considerations of the appropriate legal structure include: Personal financial situations and the need for additional funds Management skills and limitations Management styles and capabilities for working with others Concerns about exposure to personal liability 5-23

24. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Organizing and Operating a Corporation Types of Corporations Domestic—A firm is considered a domestic corporation in the state where it is incorporated Foreign—When company does business in a state other than the one where it has filed incorporation papers, it is registered as a foreign corporation in each of those states Alien—A firm incorporated in one nation that operates in another is known as an alien corporation where it operates 5-24

25. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Organizing and Operating a Corporation The Incorporation Process Where to Incorporate The Corporate Charter Articles of Incorporation 5-25

26. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Organizing and Operating a Corporation Levels of Management in a Corporation 5-26

27. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Organizing and Operating a Corporation Corporate Management Stockholders—person or organization who has bought shares of stock in a corporation and is entitled to some of its profits. Closed or Closely Held Publicly Held 5-27

28. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Organizing and Operating a Corporation Corporate Management Stock Ownership and Stockholder Rights Preferred stock owners have limited voting rights; receive dividends before others Common stock owners have voting rights but only residual claims on assets and are the last to receive any income distributions 5-28

29. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Organizing and Operating a Corporation Corporate Management Board or Directors—elected governing body of a corporation. Sets policy, authorizes major transactions, and hires and supervises the CEO Corporate Officers and Managers Make most major corporate decisions 5-29

30. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Organizing and Operating a Corporation Employee-Owned Corporations Employee ownership: where workers buy shares of stock in the company that employees them Corporate organization stays the same Most stockholders are also employees 5-30

31. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Organizing and Operating a Corporation Not-for-Profit Corporations Organizations that pursue objectives other than returning profits to owners Include: Museums Libraries Religious and human-service organizations Zoos Thousands of other groups 5-31

32. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Public and Collective Ownership Public Ownership When a unit or agency of government owns and operates an organization Government-Owned Corporations Used When: Private investors are not willing to invest in high-risk projects When private ownership has failed Operating public companies can be used to foster competition 5-32

33. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Public and Collective Ownership Customer-Owned Businesses: Cooperatives Cooperative: an organization whose owners join forces to collectively operate all or part of the functions in their industry 5-33

34. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Joining Forces Mergers and Acquisitions (M&A) Merger Vertical Merger- merger that combines firms operating at different levels in the production and marketing process. Horizontal Merger- merger that joins firms in the same industry for the purpose of diversification, increasing customer bases, cutting costs, or expanding product lines. Conglomerate Merger- merger that combines unrelated firms, usually with the goal of diversification, spurring sales growth, or spending a cash surplus in order to avoid a takeover attempt. Acquisition Joint Venture Specialized Partnership 5-34

35. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Have a good day 5-35