1. Business Organizations

2. SSEMI4 The student will explain the organization and role of business and analyze the four types of market structures in the U.S. economy.
Compare and contrast three forms of business organization—sole proprietorship, partnership, and corporation.
Explain the role of profit as an incentive for entrepreneurs.

3. A business organization is an establishment formed to carry on commercial enterprise

4. In order for a business organization to produce goods and services, they must use resources.

5. WHAT IS ANOTHER NAME FOR SCARCE RESOURCES?

6. The Factors of
Production

7. Business Organizations
Goal is PROFIT
Serves as the main link between scarce resources and consumer satisfaction

8. SOLE PROPRIETORSHIP
PARTNERSHIP
BUSINESS
ORGANIZATIONS
CORPORATION

9. Sole
Proprietorships

10. Key Terms
sole proprietorship: a business owned and managed by a single individual
business license: authorization to operate a business issued by a local government
zoning laws: laws in a city or town that designate certain areas, or zones, for residential and business use
liability: the legal obligation to pay debts
fringe benefits: payments to employees other than wages or salary.

11. Introduction What are the risks and benefits of a sole proprietorship?
Sole proprietorships are easy to start and when you are the sole owner, you receive all of the profits from the business.
On the other hand, you have total liability for the company and could lose your investment as well as other personal property if the business fails.

12. Sole Proprietorship
Business owned and managed by a single individual/family.
Entrepreneur earns all of the firm’s profits and is responsible for all its debts.
70+ percent of all businesses in the United States are sole proprietorships but they represent only 4 percent of all U.S. sales.

13. Entrepreneurs
The potential to make a profit is a big incentive for entrepreneurs to start a sole proprietorship.
Entrepreneurs must be willing to assume total responsibility and take risks.
A successful entrepreneur is:
Optimistic
Enthusiastic
Focused on the future

14. Characteristics of Proprietorships

15. START UP Advantage EASY - small amount of paperwork and legal expense
Low minimum requirement to operate - sole proprietors need only a business license, a state permit if not working out of their home, and a name for their business.

16. Profits and Losses
Advantage - OWNER RECEIVES ALL PROFITS - owner gets to keep all of the profits after paying income taxes.
Disadvantage – Owner is responsible for all the losses.

17. Legal obligation to pay debts
Liability
Legal obligation to pay debts

18. LIABILITY: Disadvantage
Unlimited liability - sole proprietorships are fully and personally responsible for all their business debts
Checkpoint Answer: Unlimited liability, limited access to resources, lack of performance

19. MANAGEMENT
Advantage - Sole proprietors have full control - a high level of freedom allows sole proprietors to run their company as they wish.
Sole proprietors are the boss. Make all decsions.
Easy to discontinue.

20. TAXATION
Advantage
Taxation is at a personal rate not the higher corporate rates.
Few regulations - the least regulated form of business organization

21. PERSONAL SATISFACTION
Sole proprietors have full control - a high level of freedom
You are the boss – make decisions
BUT …… Demands on a sole proprietorships can be personally and financially exhausting.
Easy to discontinue.

22. FINANCING GROWTH Disadvantage- Limited access to resources
Sole proprietorships must buy all the necessary resources they need to run their business, which can be very expensive.
They may lack in human capital.

23. Disadvantages (con’t)
Lack of performance - Sole proprietorships often have trouble finding and keeping good employees.
Many sole proprietorships do not have the ability to offer fringe benefits.
How does this cartoon show a major disadvantage of a sole proprietorship?
Answer: There is no one to run the business when a sole proprietor takes a vacation so they often don’t get vacations or other fringe benefits.

24. Fringe benefits
Payment other than wages or salaries
Insurance
Retirement
Paid vacation

25. LIMITED LIFE – Disadvantage - no one to carry on the business

26. PARTNERSHIPS

27. Key Terms
partnership: a business organization owned by two or more persons who agree on a specific division of responsibilities and profits
general partnership: a type of partnership in which all partners share equally in both responsibility and liability
limited partnership: a type of partnership in which only one partner is required to be a general partner
limited liability partnership (LLP): a type of partnership in which all partners are limited partners

28. Key Terms, cont.
articles of partnership: a partnership agreement that spells out each partner’s rights and responsibilities
assets: the money and other valuables belonging to an individual or business

29. Introduction
What are the risks and benefits of partnerships and franchises?
Partnerships are easy to start up, have more assets to contribute, and are subject to few regulations. But, like sole proprietorships, there is unlimited liability for at least one of the partners.
Franchises allow each owner a level of control and benefit from the support of the parent company. Disadvantages include high fees, royalties, and purchasing restrictions.

30. A business organization owned by two or more persons who agree on a specific division of responsibilities and profits
PARTNERSHIP

31. LIABILITY PARTNERSHIP
GENERAL PARTNERSHIP
LIMITED
PARTNERSHIP
LIMITED
LIABILITY PARTNERSHIP

32. Types of Partnerships General Partnerships
All parties share equally in both responsibility and liability
Limited Partnerships
Only one partner is required to be a general partner.
General partner has unlimited liability.
Limited partners contribute money; not liable for the firm’s actions; they can only lose their investment.

33. Characteristics of Partnerships

34. Little government regulation
Start up is easy – Advantage - easy and inexpensive to establish. It is a good idea, though, to sign a partnership agreement, which spells out the rights and responsibilities of each partner.
Little government regulation
Checkpoint Answer: Ease of start-up, little government regulation, more capital, better employees, taxes, shared decision-making

35. Profits and Losses
General partners share profits and losses – same as sole proprietorships.
Limited partners have limited share in profit and losses. Limited partners also have limited liability.

36. Liability
Disadvantge - Unlimited liability - at least one partner has unlimited liability (unless the partnership is an LLP) which means that person could lose everything and personal property
Lack of performance - a partnership may not outlast the life of one of the general partners

37. MANAGEMENT
Potential for conflict – disadvantage - interpersonal conflicts between partnerships can lead to disagreements and, in some cases, an end to the partnership

38. Better employees - partnerships can attract and keep talented employees more easily than sole proprietors can
Taxes – Advantage - partnerships are not subjected to any special taxes – pay at lower rate than corporations.

39. PERSONAL SATISFACTION – Advantage - Shared decision-making - each partner brings different strengths and skills to the business.
FINANCING GROWTH – Advantage - More capital - with more people involved, more capital can be raised and more money borrowed.

40. LIFE OF THE BUSINESS
Advantage – Can continue if one/some partners die or exit.
Disadvantage – Does not continue if all partners exit.

41. Corporations, Mergers, and Multinationals

42. Objectives Explain the characteristics of corporations.
Analyze the advantages of incorporation.
Analyze the disadvantages of incorporation.
Compare and contrast corporate combinations.
Describe the role of multinational corporations.

43. Key Terms
corporation: a legal entity, or being, owned by individual stockholders, each of whom has limited liability for the firm’s debts
stock: a certificate of ownership in a corporation
closely held corporation: a type of corporation that issues stock to only a few people, who are often family members
publicly held corporation: a type of corporation that sells stock on the open market
bond: a formal contract issued by a corporation or other entity that includes a promise to repay borrowed money with interest at fixed intervals

44. Key Terms, cont.
certificate of incorporation: a license to form a corporation issued by a state government
dividend: the portion of corporate profits paid out to stockholders
limited liability corporation (LLC): a type of business with limited liability for the owners, with the advantage of not paying corporate income tax
horizontal merger: the combination of two or more firms competing in the same market with the same good or service

45. Key Terms, cont.
vertical merger: two or more firms involved in different stages of producing the same good or service
conglomerate: a business combination merging more than three businesses that produce unrelated products or services
multinational corporation (MNC): a large corporation that produces and sells its goods and services in more than one country

46. Introduction What are the risks and benefits of corporations?
Corporations provide the opportunity for stockholders to own part of a company and reap the benefits of that company’s success. Corporations provide flexibility for their stockholders.
On the other hand, corporations are difficult and expensive to start and must pay double taxes. Also, the original owners can lose control over their company, since decisions are made by corporate officers an board of directors.

47. A legal entity owned by individual stockholders
CORPORATION

48. Corporation
The most complex form of business organization is the corporation.
Individual stockholders own stock in a corporation and are, therefore, part-owner of the company that issues the stock.
In the United States, corporations account for about 20 percent of all businesses but more than 80 percent of all sales.

49. Types of Corporations
Closely held corporations - Corporations that issue stock to only a few people, often family members.
Publicly held corporations - Corporations that sell stock on the open market.

50. OWN “PIECES” OF THE COMPANY, WHICH ARE CALLED STOCK
STOCKHOLDERS
SHAREHOLDERS
OWN “PIECES” OF THE COMPANY, WHICH ARE CALLED STOCK

51. If you buy stocks, you are part owner of a corporation

52. BONDS - A FORMAL CONTRACT TO REPAY BORROWED MONEY WITH INTEREST AT FIXED INTERVALS

53. Bonds/Loans Principal – dollar amount borrowed
Interest – price paid to use another’s money – cost to use another’s money

54. Characteristics of Corporations

55. CORPORATE STRUCTURE
Start up is disadvantage Difficult and expensive start-up
Corporate charters can be difficult, expensive, and time consuming to create.
Large legal expense.

56. Profits and Losses
Advantage - DIVIDEND
The portion of corporate profits paid out to stockholders
Represents a portion of corporate profits

57. Limited liability – you are not responsible
Advantages for stockholders:
Limited liability – you are not responsible
Only lose your investment in the stock
Flexibility with easily transferable stock- you can sell your stock

58. Corporations must pay corporate income taxes
TAXATION
Disadvantage
Double taxation
Corporations must pay corporate income taxes
Stockholders pay taxes on the dividends paid to stockholders
More regulation
Checkpoint Answer: Difficulty and expense of start-up, double taxation, loss of control, and more regulation.

59. MANAGEMENT AND PERSONAL SATISFACTION
Disadvantage
Loss of control
Owners do not manage the activities of a corporation
SATISFACTION
Limited to making money on your investment.

60. FINANCING GROWTH Advantage More potential for growth and longevity
Ability to raise money by borrowing
No need for special managerial skills
Able to hire talented employees

61. LIFE OF BUSINESS Advantage
Corporations exist until discontinued or go out of business.
Management changes but company live on.

62. HOW DO BUSINESSES COMBINE?

63. Combination of two or more companies into a single firm
Merger
Combination of two or more companies into a single firm

64. MERGERS
Horizontal
Mergers
Vertical
Mergers

65. Companies in the same business
When two or more firms that produce the same kind of products join forces -
Companies in the same business
Horizontal
Mergers

67. MERGERS
Horizontal
Mergers
Vertical
Mergers

68. Ex: a shirt maker buys a thread company
When firms involved in different steps of manufacturing or marketing merge –
Ex: a shirt maker buys a thread company
Vertical
Mergers

69. Horizontal and Vertical Mergers

70. Corporate Combinations
Conglomerates occur when three or more businesses that produce unrelated products or services merge.

71. Multinational Corporations
Multinational corporations are the world’s largest corporations and they sell their goods and services in more than one country.

72. Advantages and Disadvantages
Benefit consumers by producing jobs and products around the world
Help poorer countries enjoy better living standards
Spread new technology across the globe
Disadvantages
Unduly influence culture and politics in countries in which they operate
Jobs in poorer countries are often marked by low wages and poor working conditions

73. OTHER BUSINESS ORGANIZATIONS

74. Objectives Identify the different types of cooperative organizations.
Understand the purpose of nonprofit organizations, including professional and business organizations.
Explain how a business franchise operates.

75. Key Terms
cooperative: a business organization owned and operated by a group of individuals for their shared benefit
consumer cooperative: a retail outlet owned and operated by consumers that sells merchandise to members at reduced rates
service cooperative: a type of cooperative that provides a service rather than a good
producer cooperative: an agricultural marketing cooperative that helps members sell their products

76. Key Terms, cont.
nonprofit organization: an institution that functions much like a business, but does not operate for the purpose of making a profit
professional organization: a nonprofit organization that works to improve the image, working conditions, and skill levels of people in particular occupations
business association: a group organized to promote the collective business interests of an area or group of similar business interests
trade association: nonprofit organizations that promote the interests of particular industries

77. Key Terms, cont.
business franchise: a semi-independent business that pays fees to a parent company in return for the exclusive right to sell a certain product or service in a given area
royalties: the share of earnings given by a franchisee as a payment to the franchiser

78. Introduction How are some businesses organized to help others?
Cooperatives are businesses created by a group of individuals who share benefits.
Nonprofit organizations are run like a business but their goal is not to make a profit. Instead these organizations seek to benefit the public in some way.
Sometimes people opt to form a business franchise.
A business franchise is a semi-independent business that pays fees to a parent company.
In return, the business is granted the exclusive right to sell a certain product or service in a given area.

79. OTHER ORGANIZATIONS BUSINESS FRANCHISES NONPROFIT ORGANIZATIONS
COOPERATIVE
ORGANIZATIONS

80. BUSINESS
FRANCHISE
A semi-independent business that pays fees to a company in return for the exclusive right to sell a certain product or service in a given area

81. Advantages of Franchises
Built-in reputation
Management training and support
Standardized quality
National advertising programs
Financial assistance
Centralized buying power

82. Disadvantages High franchising fees and royalties
Strict operating standards
Purchasing restrictions
Limited product line
Checkpoint Answer: Advantages include a built-in reputation, management training and support, standardized quality, national advertising programs, financial assistance, and centralized buying power. Disadvantages include high franchising fees and royalties, strict operating standards, purchasing restrictions, and a limited product line.

83. Royalty payments

84. Royalties
Share of earnings given as payment

85. Cooperatives
A cooperative is a type of business organization owned and operated by a group of individuals for their shared benefit.

86. Cooperatives, cont.
Cooperatives do not have to pay income taxes because they are not corporations.
Cooperatives are found in many industries including farming and health care.

87. CONSUMER
SERVICE
CO-OPs
PRODUCER

88. Consumer Cooperatives
There are three kinds of cooperatives.
Consumer cooperatives are retail outlets owned and operated by consumers.
They sell merchandise to members at reduced prices.
Examples of consumer cooperatives include discount price clubs and housing co-ops.
Some co-ops require members to work a small number of hours to maintain membership.

89. Service and Producer Cooperatives
Service cooperatives are co-ops that provide a service.
Some service co-ops offer discounted insurance, health care, or legal help.
Credit unions are an example of a service co-op.
Producer cooperatives are agricultural marketing co-ops that help members sell their products.
Members focus their attention on their crops or livestock while the co-op markets the goods for the highest possible price.

90. Nonprofits
Nonprofit organizations function like a business but do not operate for the purpose of generating profit.
Examples of nonprofits include museums, public schools, the American Red Cross, hospitals, churches, and many other groups and charities.
Nonprofits, like co-ops, are exempt from paying income taxes, but the nonprofit must meet certain requirements to qualify for tax-exempt status.
Nonprofits have limits on their political activity.

91. Professional Organizations
Some nonprofits provide support to particular occupations or geographical areas.
Professional organizations work to improve the image, working conditions, and skill levels of people in particular occupations such as the National Education Association for educators.
Keep members up-to-date on industry trends.
Set codes of conduct that members must follow.

92. Business Associations
Promote the collective business interests of a city, state, or other geographical area.
The Better Business Bureau (BBB), which aims to protect consumers by promoting an ethical and fair marketplace is an example of a business association.

93. Trade Associations
Trade associations promote the interests of particular industries.
Many trade associations hire lobbyists to work with state legislatures and Congress to try to influence laws that affect an industry.