1. CHAPTER 3: BUSINESS ORGANIZATIONS
Section One: Forms of Business Organization

2. I. Forming a Proprietorship
Easiest form of business to start-needs only the occasional licenses and fees
Ease of start up
Relative ease of management
Decisions can be made quickly

3. Proprietorship Advantages
Owner enjoys the PROFITS of successful management without having to share
No separate business income taxes
Not recognized as a separate legal entity
Owner must pay individual income taxes on profits
Business is exempt from any tax on the income
Psychological satisfaction
Easy to get out of business

4. Proprietary Disadvantages
Unlimited liability
Owner is personally and fully responsible for all loses and debts of the business
If business fails, the owner’s personal possessions may be taken away to satisfy business debts
Difficult to raise capital
Personal financial resources are limited
Size and efficiency: Inventory is any unused stock of finished goods/parts in reserve

5. Proprietary Disadvantages
Limited Managerial Skills
Difficulty of attracting qualified employees
Fringe benefits- Employee benefits such as vacation, sick leave, retirement, medical, and health insurance may not be available
Limited lifespan: The firm legally ceases to exist when the owner dies, quits, or sells the business

6. II. Partnerships Owned by 2 or more persons
Least numerous business organization
Smallest proportion of sales and net income

7. Types of Partnerships
General Partnership: All partners are responsible for the management and financial obligations of the business.
Limited Partnership: At least one partner is not active in the daily running of the business, although he or she may have contributed funds to finance the operation
Ex.

8. Forming a Partnership Relatively easy to start
Articles of Partnership: Formal legal papers which specify arrangements between partners

9. Advantages of Partnerships
Ease of start up.
Articles of Partnership involves attorney fees and filing fee for the state.
Ease of management: Each partner usually brings different areas of expertise to the business.
Lack of special taxes: Partners draw profits from the firm and then pay individual income taxes at the end of the year

10. Advantages of Partnerships
Usually attract financial capital more easily than a sole proprietorship
Slightly larger size = greater efficiency
Lawyers, doctors, accountants
Usually attract top talent to their organizations

11. Disadvantages of Partnerships
Unlimited Liability: Each partner is fully responsible for the acts of all partners
Limited Partnership: The limited partner has limited liability
Investor’s responsibility for the debts of the business is limited by the size of their investment in the firm
If business fails with a large debt, the limited partner (investor) only loses their original investment, leaving the general partners to make up the rest

12. Disadvantages of Partnerships
Limited Life: When a partner leaves or dies, the partnership must be dissolved and reorganized.
The new partner may try to keep an agreement to keep its name
Potential for Conflict: “Why can’t we all just get along?”

13. Warm-Up Get out a sheet of paper Look up P&G
Find one of their companies, write this down
Then write down 5 products that the company makes

14. III. Corporations
Defn: A form of business organization recognized by law a a separate legal entity having all as an individual.
Can buy & sell property
Enter into legal contracts and sue and be sued
Account for 1/5 of the firms in the US
Account for 90% of all sales
Ex: dex.html

15. Forming a Corporation Very formal and legal arrangement
Incorporation (or forming a corporation) must file for permission from the state where business will have be headquartered
Charter: A government document that gives permission to create a corporation if approved
States the company name, address, purpose of business, and the number of shares of stock, or ownership certificates, within the firm

16. Forming a Corporation, continued
Shares of stock are sold to investors called…
stockholders, or shareholders.
$$ is then used to set-up corporation
A check, or dividend, is paid to shareholders if the corporation is profitable

17. Corporate Structure: Common Stock
Investors become owners with certain ownership rights, depending on type of stock purchased:
Common Stock: Basic ownership of corporation
Owner usually receives 1 vote for each share of stock
Used to elect board of directors who direct the corporation’s business by setting policies/goals
The Board hires a professional management team to run the business on a daily basis

18. Common Stock
The dividend is variable and common stock shareholders are the last to receive a dividend or get their $$ back if corporation fails.

19. Preferred Stock Nonvoting ownership shares of a corporation
These shareholders receive dividends first and they are fixed
If there are funds or property left after a business fails, preferred stockholders get their investment back first!
Preferred stockholders cannot elect the board of directors-THEY CANNOT VOTE!!

20. Advantages of the Corporation
Ease of raising financial capital
Need more capital?
Sell additional stock
Borrow $$ by issuing bonds: Written promise to repay the amount borrowed at a later date
Principal: Amount borrowed to be repaid later
Interest: The price paid by the corporation for the use of another’s $$

21. Advantages of the Corporation
Ease of finding professional managers
Limited liability for its owners
Corporation is fully responsible for its debts and obligations
**Because limited liability is so attractive, many firms incorporate just to take advantage of it

22. Advantages of the Corporation
Unlimited life: Corporation continues to exist even when ownership changes
Because the corporation is a legal entity, the name of the company remains the same, and the corporation continues to do business
Ease of transferring ownership: If a shareholder no longer wants to be an owner, they can sell the stock

23. Disadvantages of the Corporation
Difficult to get a charter
Depending on the state, attorneys’ fees and filing expense can cost several thousand $$
Owners/shareholders have little say in business affairs after voting for board of directors
Double Taxation: Corporate profits
Stockholders’ dividends are taxed twice: once as corporate profit and again as personal income

24. Disadvantages of the Corporation
Lots of Government regulation:
Register with state where the Corp. is chartered
To sell stock to the public, the Corp. must register with the Securities and Exchange Commission
Provide detailed financial statements on regular basis to the general public
When taking over another business, the Corp may require federal approval

25. Government and Business Regulation
Business Regulation: In the 20th century, various consumer groups demanded regulation of giant corporations.
Federal and state governments responded by passing stronger regulations.
Rigorous regulations for banks, insurance companies, electricity, telephone, and transportation
Ex?, Sherman and Clayton Anti-trust Acts, FDIC, Federal Reserve, FCC, Dept. of Transportation

26. Government and Business Regulation
Business Development: States try to attract new industry. Offer tax credit or a reduction in taxes for a business to move to a state
Examples in TX?

27. Mergers Mergers – combination of two or more businesses into one.
Horizontal: two alike companies join forces- AT&T and Cingular
Vertical: bring together firms that produce one product – baseball bats

28. Types of corporations
Conglomerate – four or more businesses from Mergers and Acquisitions
Multinational – corp. has businesses in many countries

29. Business Mathematics
Income Statement – shows a business’ sales, expenses and profits
Net Income – revenues minus expenses and taxes.
Expenses– inventory, wages, interest payments, and depreciation
*Depreciation is a non cash charge(your capitals goods wear out and get old)
Cash Flow – the sum of net income and non-cash charges
*it’s a real measure of profits for a business