1. The Business of Business
Chapter 4
The Business of Business

2. Major business formations in the US
Sole Proprietorship
Partnership
Corporation
S-Corporation
Limited Liability Company

3. An unincorporated business that is owned by one person
Sole Proprietorship
An unincorporated business that is owned by one person

4. Form of Business
Advantages
Disadvantages
Sole Proprietorship
72% of all US Businesses
Ease of Formation
“You’re the Boss”
Potential Profits
Partnership

5. Advantages of the Sole Proprietorship
Easy to form
The most important advantage of a SP. Aside from some local licenses, you can “Open the Doors and Sell”
“You’re the Boss”
The appeal for working for oneself is huge. As a proprietor, you are free to run the business anyway you see fit
Potential Profits
As a sole owner, you don’t have to share profits with anyone. Plus there are NO LIMITS to how much you can earn.

6. Sole Proprietorships
With this said, how much of the businesses in the US are “sole proprietorships”?
72%

7. Form of Business
Advantages
Disadvantages
Sole Proprietorship
72% of all US Businesses
Ease of Formation
“You’re the Boss”
Potential Profits
Unlimited Liability
Limited Capital
Burden of Financial Responsibility
Limited Life
Partnership

8. Disadvantages of the Sole Proprietorship
Unlimited Liability
While there are NO LIMITS to profits, there are also no limits on the amount of debt that can add up. This is “Unlimited Liability”
Two out of three new businesses fail within four years of opening
Limited Capital
The amount that the single owner can raise is limited to that person’s size of their savings and ability to borrow.
Limited Life
If you decide to close the business, or if you pass away without a written will, the business’s limited life is up. Therefore, lenders generally are cautious about lending to sole proprietorships since they may only last a few years

9. An unincorporated business owned by two or more people
Partnership
An unincorporated business owned by two or more people

10. Form of Business
Advantages
Disadvantages
Sole Proprietorship
72% of all US Businesses
Ease of Formation
“You’re the Boss”
Potential Profits
Unlimited Liability
Limited Capital
Burden of Financial Responsibility
Limited Life
Partnership
 ”Two Heads Are Better Than One”
Additional Capital

11. Advantages of the Partnership
Additional Capital
A principle advantage over a SP is the available capital (money) is increased by whatever the additional partners bring in
“Two Heads Are Better Than One”
Partners could mean more free time, more skills, talents, and ideas on how to grow the business
Easy to Organize
Partnerships, like sole proprietorships, are fairly easy to organize

12. Form of Business
Advantages
Disadvantages
Sole Proprietorship
72% of all US Businesses
Ease of Formation
“You’re the Boss”
Potential Profits
Unlimited Liability
Limited Capital
Burden of Financial Responsibility
Limited Life
Partnership
 ”Two Heads Are Better Than One”
Additional Capital
 Limited Life
Partners May Disagree
Difficult to Sell

13. Disadvantages of the Partnership
Limited Life
Perhaps even more then SP’s, when a partner dies or resigns, a new partnership must be created or the business can go away.
Partners May Disagree
The possibility of conflict among partners is an easily seen weakness of a partnership. Studies have shown that disagreement of partners is a frequent cause of business failure
Difficult to Sell
It is difficult to find a replacement partner when one wants to withdraw from a partnership. The question of fairness for selling ones ownership in a business becomes a hugely contested idea where the buyer wants to buy low and the seller wants the maximum price.

14. Disadvantages of the Partnership
Limited Capital
The amount of capital that partnerships can raise is limited by the wealth of the partners, the business’s earning power, and its ability to borrow
Unlimited Liability
The principle disadvantage of the partnership can be summed up in two words: unlimited liability. This means each partner or group of partners could be held personally liable for the debts of the business.
Again, since the profits AND the debts can be unlimited, many people are reluctant to enter into partnerships because it makes them personally liable for the debts of the business.

15. Corporations
A business organization licensed to operate by a state or the federal government

16. How to create a corporation
A corporation’s license is called a charter
A charter gives the firm the right to do business and issue a specific number of shares of stock.
Shares of stock are certificates representing ownership of a company
Anyone holding 1 or more shares is a partial owner of a corporation
Those who own shares of stock are also called Share holders- However shareholders do not run the day to day operations nor are they legally liable for the debt of companies

17. Shareholders >Elect > Board of Directors
Corporate Structure
Shareholders >Elect > Board of Directors
Board of Directors> Appoints> Officers (CEO, COO, CFO, ETC)
The Officers> Hire> The President/ Presidents
The Presidents> Hire> The Vice President/ VPs
The Vice Presidents> Hire> Managers
The Managers> Hire> Employees

18. How Large Corporations are Organized
Shareholders: again, these are the owners of the company but can number in the hundreds of thousands if not millions
Therefore, the Officers and the Board of Directors of a Corporation place individuals to run the day to day operations of a corporations.

19. How Large Corporations are Organized
The Board of Directors are elected by the Shareholders of the corporation to appoint the officers of the corporation.
The way shareholders vote is 1 share equals 1 vote. If one person holds 25,000 shares, they get 25,000 votes. Therefore large shareholders can appoint themselves “Chairman of the Board”
The role of the Board of Directors therefore is appoint the officers of the corporation on behalf of the shareholders.

20. How Large Corporations are Organized
The Officers of a Corporation are SELECTED/ appointed by the board of directors of the corporation.
Officers that can be selected can be:
Chief Executive Officer (CEO)
Chief Organizing Officer (COO)
Chief Financial Officer (CFO)
Presidents/ Vice Presidents
The role of the Officers is the day to day operation of the corporation on behalf of the Board of Directors.

21. How Large Corporations are Organized
The Presidents/ Vice Presidents of a Corporation are hired by the officers
Officers that can be hired can be:
President of International Markets
President of US Operations
Vice President of Communications
Vice President of Travel
The role of the Presidents/ Vice Presidents is a more focused/ specialized day to day operation of the corporation on behalf of the Officers of the corporation.

22. How Large Corporations are Organized
The Managers of a Corporation are hired by the Presidents/ Vice Presidents of a corporation
Managers that can be hired can be:
Manager of Eastern European Regional Sales
Manager of US Operations
Manager of Internet Communications
Manager of Game Stop in Lyndhurst, NJ
The role of the managers is the overall supervision of workers on the day to day/ basic operations of the corporation for the President/ Vice Presidents.

23. 87% of the Business Generated in This Country
Form of Business
Advantages
Disadvantages
Corporation
87% of the Business Generated in This Country
Limited Liability
Unlimited Life
Ease of Transfer

24. Advantages of the Corporation
Limited Liability
Because the corporation is legally separated from those who own it, the shareholders cannot be held liable for its debts.
Therefore if the business fails, the most money that a shareholder can lose is limited to what they paid for the stock
So corporations are known as “Incorporated”/ “INC” in the US and “Limited” in the United Kingdom (Great Britain)
This limited liability is also another reason why people feel free to invest in corporations

25. Advantages of the Corporation
Unlimited Life
Unlike SP’s or Partnerships, when owners of a corporation withdraw (sell their stocks), or die, corporations can go on forever.
This also makes it easier for corporations to borrow money for long periods of time (major loans from banks)
Ease of Transfer
Buying in or selling out of a corporation is relatively easy
To buy, all one needs to do is find someone with stock to sell
To sell, all one needs to do is find a buyer for the shares that one owns.

26. 87% of the Business Generated in This Country
Form of Business
Advantages
Disadvantages
Corporation
87% of the Business Generated in This Country
Limited Liability
Unlimited Life
Ease of Transfer
Difficulty and Expense of Organizing
Double Taxation

27. Disadvantages of the Corporation
Difficulty and Expense of Organizing
Organizing and operating a corporation is a complex process
It usually requires the services of lawyers and accountants, which are services that could cost hundreds of thousands of dollars.
Double Taxation
One of the reasons why people buy stocks are dividends, which are profits distributed to shareholders.
Dividends are subject to personal income taxes.
Then, after those dividends are taxed, the corporation itself pays “Corporate Income Taxes”

28. Disadvantages of the Corporation
Double Taxation
Many critics argue that double taxation is unfair
One way around this double taxation is the newer “S Corporation” companies can file to create for with the Federal Government

29. S Corporations
A business organization which allows the owners of corporations with 100 or fewer stockholders to be taxed as though they were SP’s or P’s
Advantages: Limited Liability, Unlimited Life, Ease of Transfer, and NO DOUBLE TAXATION
Disadvantages include: Difficulty and expense of formation

30. Limited Liability Company (LLC)
The newest form of business organization.
LLCs combine advantages and the disadvantages of Sole Proprietorships, Partnerships, and Corporations
“Members” are not personally liable for debts and LLC’s can sue or be sued as a company
Advantages: Limited Liability, Easier to Form, and NO DOUBLE TAXATION
Disadvantages include: Life may be limited, and ownership could be difficult to transfer
The advantages of LLC’s make it the fastest growing form of small business ownership in the US Today.

31. Other Forms of Business Organization
Government-Owned Corporations
Instead of private owners, the government owns these for profit companies.
Examples include : The New Jersey Turnpike (State) and Tennessee River Authority (Federal)
However, many of these companies have moved towards Privatization
Privatization is the transformation of publicly run businesses into privately operated and owned ones.

32. Other Forms of Business Organization
Non-for-Profits Corporations
Unlike businesses that distribute profits to their owners, any money earned beyond costs of the organizations are put back into the Non-For-Profits Corporation’s goals, missions, or mission statement
Examples include: The American Red Cross, Boy Scouts of America, Girl Scouts of America, the United Way, Little League International, ETC

33. Other Forms of Business Organization
Cooperatives (Co-Op’s)
Cooperatives are associations of individuals or organizations.
Co-op “members” band together to buy or sell more efficiently than they could as individuals.

34. Other Forms of Business Organization
EXAMPLES OF COOPERATIVES
Consumer Cooperative- is a retail business owned by some or all of its customers. The “Members” of this cooperative are the only ones who can buy from this store
Examples include: Costco, BJ’s, and…

35. Other Forms of Business Organization
EXAMPLES OF COOPERATIVES
Producer Cooperatives- organizations of producers who cooperate in buying supplies and equipment and in marketing their products
EXAMPLES INCLUDE: Sunkist Oranges, Blue Diamond Nuts, Alaska Gold Brand (Seafood)
Cooperative Apartment Building- is run by a corporation whose capital stock is owned by its tenants . Any profits and tax benefits help defray the cost of the apartments of the owners