1. CH. 9: Business Organizations 1.Sole Proprietorships 2.Partnerships 3.Corporations and Franchises

3. ENTREPRENEUR: Person willing to take the risk and start a business

4. SOLE PROPRIETORSHIP Owned and controlled by a single individual : “Proprietor” = OWNER of PROPERTY Most basic type Most common –Only 5% of sales –But 70% of businesses Most small, local businesses

5. ADVANTAGES of SOLE PROPRIETORSHIP Less complicated (easy to form / dissolve) Easy decision-making (owner “calls the shots”) Direct communication with employees Fewer government regulations Owner gets all the profits & pride (high incentive) --makes all decisions --quick NO DOUBLE TAXATION: Personal income taxes often lower than corp. taxes Lenders are more willing to extend credit because of UNLIMITED LIABILITY of sole owner

6. KEY TERMS: ASSETS: What you OWN! LIABILITIES: What you OWE!

7. DISADVANTAGES of SOLE PROPRIETORSHIP Borrowing large amounts = harder because of limited assets Small budget limits variety and diversity of products UNLIMITED LIABILITY complete legal responsibility for all debts and damages lose house, car, savings, etc., as well as business (personal as well as business ASSETS) …THUS, HIGH INSURANCE COSTS! Owner has to make all the decisions even in areas which are out of his expertise Demanding & time consuming Business closes if owner dies, goes bankrupt, or is unwilling or unable to work

8. PARTNERSHIP A business that two or more individuals own and operate Account for –5% of annual sales –15% of businesses

9. ADVANTAGES of PARTNERSHIPS More human & financial resources –Greater efficiency with each partner working in his area of expertise –Combines CAPITAL of two or more, thus, makes more $ available to operate a larger business –Creditors may be willing to lend more money because risk is shared PRIDE in ownership: all profit & pride belongs to the FEW partners (high incentive) Losses are shared NO DOUBLE TAXATION: Personal income taxes may be lower than corporate taxes

10. DISADVANTAGES of PARTNERSHIPS More difficult to form & dissolve Communication between owners & employees isn’t as direct Slower decision making (consensus); disagreements lead to problems Borrowing large amounts = harder because of limited assets Must SHARE PROFITS UNLIMITED LIABILITY (responsible if partner can’t pay and responsible for partners’ acts!) --complete legal responsibility for all debts and damages --lose house, car, savings, etc., as well as business (personal as well as business ASSETS) Business closes if one partner dies, leaves, or is unwilling or unable to work (uncertainty = risk for creditor)

11. LIMITED PARTNERSHIP Special form of partnership GENERAL PARTNER: --manages firm --has full responsibility for firm’s debt LIMITED PARTNER: --supplies money or property --has no voice in management Certificate of Partnership: (minimum info) co. name, nature of business, principal place of business, names and addresses of each partner, how long partnership will last, amount contributed by each partner

12. JOINT VENTURE A temporary partnership Set up for a specific purpose For a short period of time

13. CORPORATION An organization owned by stockholders Account for –90% of all sales (large economic impact!) –15% of businesses (relatively few) Treated as a PERSON under the LAW (a separate legal entity; it can –Own property –Pay taxes –Make contracts –Sue and be sued

14. ADVANTAGES of CORPORATIONS Access to the most financial resources due to sale of STOCKS & BONDS, thus can develop diversified product line LIMITED LIABILITY: The corp., not its stockholders, is responsible for its debts. Creditors cannot take stockholders’ personal property; stockholder can lose only what he’s got in the stock MANAGEMENT = divided among trained personnel; allows for large & complex operations PRIDE in ownership of stock FINANCING GROWTH: issue stock to raise CAPITAL PERPETUAL EXISTENCE: Corp. can continue as long as profitable; not affected by death of stockholders

15. DISADVANTAGES of CORPORATIONS DECISION MAKING can be slow and complicated (Board of Directors must vote) PRINCIPAL-AGENT PROBLEM: management’s interests and the STOCKHOLDERS’ interests aren’t always the same PROFIT IS DOUBLE TAXED: –CORPORATE PROFIT TAX: Federal gov’t and some state & local govt’s tax corporate profits; CORP. “INCOME TAX” –Profits paid to stockholders as DIVIDENDS are taxes again as income Some states tax CORPORATE PROPERTY Owners (STOCKHOLDERS) have little say in how the corporation is run

16. ARTICLES of INCORPORTATION Filed with STATE in order to obtain a CORPORATE CHARTER (a license to operate from that state) Includes: –Name, address, & purpose of corp. –Names & addresses of bd. of directors –Number of shares of stock to be issued –Amount of money capital to be raised through issuing stock

17. FRANCHISE A contract in which a FRANCHISOR sells to another business (FRANCHISEE) the right to --use its name (and advertising) --sell its products --use its business model & methods or training program FRANCHISEE pays fee which may include a percentage of all $$$ taken in EX.: McDonalds & McAllister’s Deli

18. MERGERS Occur when 2 or more businesses unite under the same ownership One can buy the other or they can simply combine 3 categories: –HORIZONTAL MERGERS –VERTICAL MERGERS –CONGLOMERATE MERGERS

19. 3 Categories of MERGERS: HORIZONTAL MERGER: –2 companies at the same stage of production join; eliminates competition –McDonalds & Burger King –VERTICAL MERGER: –2 companies at different stages of production of the same product merge –McDonalds and a meat processing company CONGLOMERATE MERGER –2 totally UNRELATED companies merge

20. Celler-Kefauver Act 1950 Prohibits any type of merger that gives merging firms an unfair advantage in the marketplace (MONOPOLY)

21. INFO. on STOCKS Types Benefits and risks Primary and Secondary Markets COMING SOON !!! We’ll cover these when we talk about FINANCING A BUSINESS!