1. Business Organizations
Domain 2: Microeconomics

2. Business Organization
An establishment formed to carry on a commercial enterprise
Four FORMS:
Sole Proprietorships
Partnerships
Corporations
Franchises
Business Organization

3. Any business owned and operated by a single individual
Most common business organization in the U.S.
75% of all businesses fall into this category
Most are very small
Sole Proprietorship
Any business owned and operated by a single individual

4. Advantages of Sole Proprietorships
Ease of Start-Up and Few Regulations
Small amount of paperwork and legal expenses
least regulated form of business.
Full Control
Owners can run their businesses as they wish.
Sole Receiver of Profits
Easy to Discontinue
Besides paying off legal obligations, such as taxes and debt, no other legal obligations need to be met to stop doing business.

5. Disadvantages of Sole Proprietorships
Unlimited Liability - All debts and judgements
limited Access to Resources - such as physical capital. Human capital can also be limited, because no one knows everything.
Often lack skills to run a business.
May not be able to keep up with demand.
lack permanence. Whenever an owner closes shop due to illness, retirement, or any other reason, the business ceases to exist.
Problems finding and keeping good employees b/c can’t offer benefits of larger businesses.

6. Two Categories:
General Partnership
Partners share equally in both responsibility and liability.
Limited Partnership
One partner required to to have unlimited personal liability for the firm.
Other partner may be “Silent”, providing funding, capital, or other resources.
Partnership
Owned by 2 or more people who agree on responsibility and profits
7 % of all businesses are partnerships are partnerships

7. Advantages of Partnerships
Ease of Start-Up
Easy to establish.
No required partnership agreement, but articles of partnership are recommended.
Shared Decision Making and Specialization
Each partner brings different strengths and skills to the business.
Larger Pool of Capital
Each partner's assets, or money and other valuables, improve the firm's ability to borrow funds for operations or expansion.
Taxation
Partners pay taxes for all business income on individual tax returns.

8. Disadvantages of Partnerships
Unless the partnership is a limited liability partnership, at least one partner has unlimited liability.
General partners are bound by each other’s actions.
Partnerships also have the potential for conflict.
Partners need to ensure that they agree about work habits, goals, management styles, ethics, and general business philosophies.

9. Corporations 20% of all businesses are corporations
90% of all products sold are made by corporations
70% of all income earned in the nation is generated by corporations
Stocks, or shares, represent a stockholder’s portion of ownership of a corporation.
Corporations
A legal entity owned by individual shareholders of corporate stock certificates.

10. Advantages of Corporations
Advantages for Corporate Stockholders
Individual investors not liable for the corporation’s actions.
Shares of stock are transferable, stockholders can sell stock to others for money at any time.
Advantages for the Corporation
Potential for more growth than other business forms.
Can borrow money by selling corporate bonds.
Can hire the best available labor to create and market the best services or goods possible.
Corporations have long lives.

11. Disadvantages of Corporations
Difficulty and Expense of Start-Up
Corporate charters - expensive and time consuming to establish.
A state license (certificate of incorporation) must be obtained.
Double Taxation - Corporations pay taxes on profits AND owners pay taxes on dividends (portion of the corporate profits paid to them)
Loss of Control - CEO, Managers and Board of Directors, not owners, manage the corporation.
Corporations face more government regulations than other forms of business organization.

12. Corporate Combinations
Horizontal Mergers
combine two or more firms competing in same market with same good or service.
Vertical Mergers
combine two or more firms involved in different stages of producing the same good or service.
Conglomerate
business combination merging more than three businesses that make unrelated products.

13. The Franchiser develops products and works with the owners to help them produce and sell their products.
The franchisee (business owner) in exchange for support in setting up the business and providing structure, shares a percentage of profits and pays fees called royalties.
Franchises
Semi-independent business (Franchisee) that pays fees to a parent company (franchiser)

14. Advantages of Franchises
Management Training and Support
Train inexperienced owners to increase chance of success
Standardized Quality
Parent companies (franchisers) require owners (franchisees) to follow rules and processes to guarantee quality
National Advertising
Parent company/franchiser develop, implements, and pays for most of the advertising of the business on behalf of franchisees.

15. Advantages of Franchises
Financial Assistance
Some Franchisers offer financing to help Franchisers start their business
Centralized Buying Power
Franchises buy materials in bulk for their locations.

16. Disadvantages of Franchises
High fees and royalties
Strict standards
Purchasing restrictions
Limited product line