BUSINESS

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BUSINESS ORGANIZATIONS
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Business Organizations

• Section Focus
• What are the different types of
• business organizations?
• 2. Describe the characteristics of
• sole proprietorships, partnerships,
• and corporations.
• 3. Analyze the advantages and disadvantages of
• business organizations.
• 4. What is the difference between
• stocks owner and bonds lender?
• 5. What are the advantages and
• disadvantages of franchises?
• 6. What makes McDonalds the greatest franchise
  ever?
• not the greatest hamburgers, just the
  greatest franchise

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Business Organizations

• Total Business Sales
• Sole Proprietorships
• 5 434 billion
• Ave. 60,000
• Partnerships
• 11 500 billion
• Ave. 250,000
• Corporations Ave. 3 M
• 84 8 trillion
• 45 made over 20 bil.
• 143 Made over 10 bil.
• Only 20 nations have GDPs
• greater than Wal-Marts 379 bil.

• 22 Million businesses
• Sole Proprietorships
• 72-over 16 million
• Partnerships
• 8 - 1.5 million
• Corporations
• 20 - 4 million

Lets start a dance company.
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THE BUSINESS POPULATION
Business Shares of Domestic Output
Percentage of Firms
Percentage of Sales
Corporations 20
Partnerships 8
Corporations 84
Sole Proprietorships 72
Partnerships 11
Farmer
Sole Proprietorship 5
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Business Failures
Over 500,000 small businesses are launched each
year. One third of these start-ups fail
within two years.
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They are the simplest to form because of
the small amount of capital needed to start
up. Examples are beauticians, dentists,
lawyers, dry-cleaning and lawn care and
lemonade stands.
1. Sole proprietorships one individual in
business for himself. They make up 72 of all
businesses and take in 5 of total
profits.
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Distribution of Sole Proprietorships Based on
Annual Sales and Industry
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2. Advantages of a Sole Proprietorship
A. Easy to quit the business if the
owner decides to do so. There are no
co-owners to consult. B. Owners receive the
entire profit. C. Easy to formno
complicated legal documents or
complicated tax forms, small amount of capital
needed. Personal satisfaction
(psychological-being your own boss)
prestige and a sense of accomplishment. D.
Total control can make decisions
quickly, can hire and fire easily, can
respond quickly to trends.
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A. Unlimited liability (debt) - have to
forfeit their personal possessions as
well as their businesses. (auto, other
business, house, savings) B. Burden of sole
responsibility must have business
sense. C. Limited potential for growth
collateral (any thing of value to guarantee
a loan like giving up your personal
possessions) Lets say you put your
home up for collateral but have to give it up
D. Difficult to attract qualified employeescant
offer fringe benefits. Lets say you ask for
more benefits E. Short life span depends on
owners health and competence. If the owner
dies, it is over.
3. Disadvantages of Sole proprietorships
I want medical benefits!
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4 Partnership - business operated by 2 or
more people.They are the least common with only
8 and take in only 11 of profits.
Two Forms of Partnerships 5 1. General equal
decision making unlimited liability
among partners.
6 2. Limited some non-active partners join
as an investment (and thus have limited
liability-just the investment, not the
property). He is a silent partner.
Lets say your silent partner puts up 30,000 to
insure the loan.
I gave 30,000 as a silent partner, so I dont
have to do anything.
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Advantages of Partnerships Two heads are better
than one.
Two Heads better than One Head
Specialization specific duties assigned
to different partners. A. Sharing
of losses. Can borrow more and can sustain
heavier losses. B. Easy to form. Small
amount of money to start operate. C. Shared
decision making more informed decisions. D.
Personal satisfaction sense of accomplishment.
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Distribution of Partnerships Based on Annual
Sales Industry
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8. Disadvantages of Partnerships
A. Disagreements among partners
conflicts delay decisions, lower employee
morale, lessen efficiency. Each partner
is responsible for the acts of all other
partners. Must choose good
partners. B. Have to share the profits.
C. Unlimited liability can lose their
business and personal possessions. D.
Limited life sickness, conflicts, or
death can end the partnership.
Take That!
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Demonstration of Unlimited Liability
Harold Nodoe, Gloria Poor and Jack Rich
owned the Trio Dress Shoppe as a partnership.
Under the terms of Their partnership agreement,
Nodoe and Poor were entitled each to 40 of
the profits, while the remaining 20 went to
Rich. Last month the firm collapsed. After
selling off everything it owned, the company
still owed its creditors 10,000. Since Nodoe
and Poor had no assets of their own, the
creditors recovered the total amount owed to
them from Jack Richs personal bank account.
Harold Nodoe
Gloria Poor
Jack Rich
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Largest Corporate Profits - 2007

• Wal-Mart 379 B
• Exxon Mobil 359
• Chevron 204
• Conoco 187
• General Motors 173
• GE 173
• Ford 172
• Citigroup 146
• Bank of America 116
• AIG 110
• HP 104
• J.P. Morgan 100
• Berkshire-Hath 99
• Verizon 93
• HP 92
• IBM 99
• Valero 91
• Home Depot 90
• McKesson 88

• Largest Employers
• 1. Wal-Mart 1.35 M associates
• 1.6 million associates worldwide
• 2. Sears Holding 400,000
• 3. General Motors 386,000
• 4. McDs 364,000
• 5. UPS 359,000
• 6. IBM 316,000
• 7. GE 313,000
• Wal-Mart has 4,179 total stores
• in the U.S. 1,868 Wal-Mart stores,
• 1,586 Wal-Mart Super Centers,
• 725 Sams Clubs in the U.S.
• The GDPs for the Virgin Islands
• is 1.8 billion for Djibouti, it
• is 582 million and for
• Afghanistan, it is 21 billion.

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Wal-Mart example

• Wal-Marts IPO was in 1972. 300,000 shares
  were sold at 16.50 per share.
• The stock has split 11 times (2 for 1 splits)
  since then last split was in 1999.
• If you purchased 100 shares of Wal-Mart on the
  day of the IPO you would have spent 1,650.
• Today you would have 204,000 shares of stock.
• Today current value of your shares would be
• 11,044,560 (stock closed at 54.14
  yesterday).
• Each quarter you would be receiving a check for
  136,680 (at current dividend of .67). Annual
  income for dividends alone would be 546,720!

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9 Corporations a business organization
recognized as a separate legal entity
(existence).
10 Stockholders are the owners of a
corporation who invest by buying shares.
Stock the certificate of ownership. 9
Corporations make up about 20 of business
organizations but produce over 90 of total
sales. Corporations can operate like a sole
proprietor. Inc. means the business is a
corporation. Treated by the courts as
an artificial person. They can sue, be sued,
enter into contracts, and pay taxes.
Two Types of Corporations 11 Publicly owned
anyone can invest by buying shares, so
unlimited of owners. Includes most
corporations. 12 Closed is owned by a limited
number of stockholders. Ford Motor
Company was family owned (closed) until 1956.
They went public in 1956 issued 10,200,000
shares of stock. 13 Wal-Mart leads all other
corporations in sales at 371 billion.
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• Corporate Trivia
• A corporation can be sued but the people who own
  the corporation (stockholders) can not be sued.
• A corporation has potentially perpetual life.
• 1.) Nearly all large companies are corporations.
• 2.) Nearly all corporations are small companies.
• 3.) Therefore, a small minority of corporations
  constitute nearly all the large companies.
• In other words, of 4 million corporations, about
  2,000 are large companies, and these 2,000 large
  corporations constitute the vast majority of the
  nations large companies.
• Also, the 15 of corporations that do more than
  1 million in sales take in in 85 of the
  receipts of corporations.

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Where The Jobs Are And Were

• 2007 1980
• Wal-Mart 1,350,000 GM 853,000
• McDonalds 418,000 Ford 495,000
• Sears Holding 400,000 GE 405,000
• 4. UPS 355,000 ITT 368,000
• 5. Ford 327,500 International
  Telephone Telegraph
• 6. GM 325,000 IBM 337,000
• Then there are new jobs in new technologies that
• didnt exist in 1980. Cisco has 34,000 Microsoft
  
• has 55,000 Oracle has 40,000 Dell has 46,000

Surviving as a business is no small feat. 1/3
of the firms in the Fortune 500 list in 1970 no
longer exist.
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If a company had only 200 shares and you
bought a share, you would own 1/200th of the
company.
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14 Stockholders (owners) and bondholders
(lenders) For companies, stocks and bonds
are 2 ways to raise money. For consumers,
they are a way to earn money.
15 Common stock (owners are voters) gives a
voice in how the corporation is run and a
share in variable dividends high
dividends if profits are high. The Board of
Directors may wish to withhold all
dividends if the money is needed for plant
expansion or payment on debts. Because they can
vote, they determine how a corporation is
managed. They get one vote for every share
they own. In a good year, they will
receive a higher dividend than preferred
stockholders. (Preferred stock dividends are
fixed, common stock is not, so they are
taking more risk.
Preferred Stock (non-voters) guaranteed
dividends that are paid from profits before
the company pays any dividends on common
stock. If the company is unable to pay this
fixed dividend in full, it makes up the
difference when the companys profits
increase. They are like a silent partner
because they can not vote and have no say in
how the business is run.
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16 Corporate Bonds a certificate issued by a
corporation in exchange for money borrowed
from investors. There is a written promise
to repay the amount borrowed at a later date
(an I.O.U.) lending money for 10, 20, or 30
years. Bondholders are creditors, not owners.
17 Advantages of Corporations from a Stockholders
Viewpoint A 1. Limited liability limited to
the amount invested. His personal assets
may not be seized to pay corporate debts. B 2.
May earn a profit without working.
18 Advantages From the Corporations Viewpoint A
1. Separation of ownership from management can
hire the best management available.
Specialized talent can be hired in all
areas. B 2. Easy to raise capital can issue
stocks or sell bonds allowing the
corporation to tap the savings of thousands. C
3. Longevity they have a life independent of
their owners.
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Disadvantages of a Corporation

• Disadvantages from the stockholders point of
  view.
• When stockholders earn a profit, they feel no
  great sense
• of pride.

19 Disadvantages from the corporations point of
view. A 1. Slow in decision making must go
thru chain of command.
B 2. Many government restrictions must
follow regulations of the SEC, comply
with laws on merging and maintain many
records. C 3. Heavy organizing expenses pay
for its charter and then depending on the
state, expenses can run from a few
hundred to thousands of dollars. D 4. Double
taxation when a company distributes profits
(dividends) to its stockholders, they have to
pay personal income tax on dividends in
excess of 100. Corporations earnings are
subject to taxation. The income tax on
corporations is 15 on the first 50,000 25
from 50,001- 75,000 34 from
75,001-100,000 39 from 100,001-335,000
35 from 335,001-10 mil. 38 from
10M-18.3million a flat 35 over18.3 million.
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Bull and Bear Markets
Then there is the kangaroo market.
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Decrease in Wealth
508 points 24 drop in one day
10-19-87
On this day, Sam Walton, the richest man
in the world, had a paper loss of 1.5 billion.
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Date Decline Decline 10/19/87 508
points 24 10/28/29 38 points
13 10/29/29 31 points 12 11/26/29 26
points 10 12/18/1899 6 points
8 8/12/32 6 points 8 3/14/07
7 points 8 10/26/87 156 points
8 7/21/33 8 points 8 10/18/37
11 points 8 2/01/17 7 points
7 10/27/97 554 points 7 700
billion lost in one day 4/14/2000 661 points
6 3/2000-2/2003 7.7 trillion was
lost Market value was worth 17 trillion
Bad Days On Wall Street
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Advantages/Disadvantages of Sole Proprietorships
Advantages
Disadvantages
Unlimited Liability
Freedom
Ease of Formation
Lack of Continuity
Low Start-up Costs
Difficulty Raising Money
Single Taxation
Reliance On One Person
Advantages/Disadvantages of General Partnership
Advantages
Disadvantages
Unlimited Liability
Larger Talent Pool
Lack of Continuity
Larger Money Pool
Ease of Formation
Ownership Transfer Difficult
Possibility of Conflict
Single Taxation
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Advantages/Disadvantages of Corporations
Advantages
Disadvantages
Limited Liability
Stockholder Revolts
Continuity
High Start-up cost
Greater likelihood of professional Management
High Cost of Regulation
Easier Access to Money
Double Taxation
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3 Types of Corporate Combinations20 1. What
are the three ways corporate merger combinations
can take place? (A merger is when one
company absorbs another) 2. What is the
current trend in corporate combinations?
A Horizontal Combinations (a grouping of
competitors) a merger between corporations
that make the same product. This would be
a merger of two or more banks, or railroads,
or airline companies, etc. Firms may merge to
catch up with or eliminate their rivals.
Chevron-Texaco bought Unical Oil. Royal
Caribbean Cruises acquired Celebrity Cruise Line
and doubled in size, became the 2nd largest
cruise line behind Carnival. Staples
tried to acquire Office Depot but the government
blocked it on the grounds that it would
reduce competition. Morgan-Chase-Bank One58 B
Cingular-ATT Wireless 41 B Compaq-HP
23 B GTE-Bell Atlantic 71 B
Chevron-Texaco 43 B Daimler-Chrysler-Benz 4
1 B Sprint-Nextel 35 B Bank of
Am.-FleetBoston Finan. 47 B
American Motors
Chrysler
Chrysler
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Horizontal Merger
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Standard Oil's Horizontal Mergers

• Standard Oil Trust John D. Rockefeller had
  become rich during the Civil War supplying
  grain and meat, but he realized the potential the
  discovery of oil would bring about.
• In 1863, he built a refinery in Ohio which
  brought in quick profits
• In 1870, he and some associates formed
  the Standard Oil Company of Ohio.
• Because Rockefeller had no need for storage and
  insurance fees, he negotiated with the railroad
  for refunds which allowed him to reduce
  the cost of oil, underselling his
  competitors
• When Rockefeller had enough capital, he
  intended to buy out his competitors refineries
  (horizontal consolidation), but most state laws
  prevented one company from buying stock in
  another
• Rockefellers lawyer, Samuel Dodd, found a
  loophole
• In 1882, the owners of
• Standard Oil and the allied
• companies would combine
• their operations.
• Companies would turn over
• their assets to 9 trustees and
• in turn would get a share of
• the profits
• This new type of monopoly
• would be called a trust
• comprising 40 companies

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B Vertical Combinations merger of companies
that are involved in different phases of
production of the same product. Purchasing one
of your suppliers
Examples 1. Automaker buys a tire factory 2.
Bridgestone Tire buying a rubber plantation 3.
Campbell Soup buying mushroom farms 4. Funeral
Home bought a cemetery and a floral shop 5. Ford
bought a steel mill to produce steel needed for
autos
Resources ore, coal, iron

• Shell Oil Co. owns
• Oil fields
• Refineries, and
• Retail gasoline
• stations

Transportation shipping RR cos
Steel Mills
USX (Steel)
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Vertical Merger
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Carnegie Steel's Vertical Mergers

• Carnegie Steel At the age of 30, Andrew
  Carnegie wisely decided to invest his wealth into
  steel shortly after the Bessemer Steel process
  came to light.
• In the 1870s, he set up the first American
  steel mills in Pittsburg, PA.
• By 1889, the Carnegie Steel Company was
  established.
• He soon had enough money to buy the companies
  that performed each phase of production (mines,
  pig iron furnaces, shipping companies, rail
  lines) This is known as vertical consolidation
• This allowed Carnegie Steel to keep low
  production costs and therefore low prices for
  consumers.
• This was because of the phenomenon known as
  economies of scale
• As production increases, costs are lowered
• Small companies could not compete because they
  did not own all phases of production.

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C Conglomerate (Unrelated) Combination merger
between four or more companies producing
unrelated products. None is responsible for
the majority of sales. These mergers may
include a number of subsidiaries acquired
companies that have not been required to abandon
their corporate identity.
American Brands, Inc.
Tobacco Products
Distilled Spirits
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About 3 trillion in mergers each year worldwide
about 1.6 trillion in the U.S. Diversification
is a good reason for conglomerate mergers. You
are not putting all of your eggs in one
basket. Your over- all sales and profits will
be protected. R.J. Reynolds- one of biggest 1.
Sea-land (containerized shipping) 2. KFC (2nd
largest fast-food chain) 3. Del Monte (fruit
processor) 4. Heublein (distilled
spirits) Pfizer makes Viagra Lipitor. 1.
Chewing gum (Trident,Dentyne) 2. Razors
(Schick) 3. Cough drops (Halls) 4. Breath mints
(Clorets, Certs) 5. Antacids (Rolaids)
Conglomerate Merger
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The trends in mergers in the 90s was toward
vertical and horizontal combinations. The
biggest cause of merger failures was mismatched
corporations,therefore, conglomerate mergers
were the ones most likely to fail.

• Advantages of Corporate Mergers
• Efficiency eliminates overlapping jobs, can
  share resources
• and marketing skills. Mergers may lead to
  lower consumer
• prices making them better able to compete in
  world markets.
• 2. Less expensive, compared to having to build
  new plants and
• hire new employees.
• 3. Stockholders in the acquired corporations
  normally benefit
• by having stock go up in value by about 30.
• 4. Increased size means they can borrow more
  money.

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Disadvantages of Corporate Mergers

• Managers of merged corporations may not have
• the necessary supervisory skills.
• 2. Added unemployment when some positions are
• eliminated. 12,500 were laid off in Fleet
  Boston-
• Bank of America merger saving 650M.
• When Cingular bought ATT Wireless, 10,000
• were laid off.
• 3. Purchasing corporations stock normally
  declines.
• 4. Higher prices and fewer choices for consumers.
• 5. Acquiring corporation normally goes into debt.

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What Town is This?
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Franchises, Cooperatives and Nonprofit
Organizations
22 Franchise gives an individual an agreement to
market a companys product in return for
a percentage (royalty) of the profits.
Semi-independent business. The company is the
franchiser and the individual is the
franchisee. The 1st franchise operation was
started by Singer Company in 1851 to sell sewing
machines. In the last 40 years, franchising has
really taken off, led by Ray Kroc of
McDonalds. Today we have franchising for
everything from hemorrhoid clinics You bend,
we mend to auto clinics. A typical large city
in the U.S. will have its share of Burger Kings,
Foto-Mat, KFCs, Goodyear, Taco Bell, Pizza Hut,
Dunkin Donuts, and others. There are 3,000
franchises in 670 industries, with 600,000
outlets. The franchiser will train your
personnel, take care of marketing and
accounting. The franchisee receives a
tried-and-tested business method.
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23 Advantages of Franchises A 1. Benefits of a
well known trade name, systemized
management, and national advertisement. B 2.
Less than 5 fail each year (65 of all
independently owned businesses fail within
the first 5 years). C 3. Chance to own your
own business with minimum risk.
24 Disadvantages of Franchises A 1. May be too
many restrictions imposed so independence
is sacrificed. B 2. Takes a lot of money for
start-up 3. May lose your investment if the
company goes bankrupt.
Some franchises such as pizza, video rentals,
frozen yogurt, instant printing, tanning
parlors will not make it because they are either
too competitive or too unhealthy. Tanning beds
are very dangerous. There are two major types of
ultraviolet radiation-UV-A think of AAging.
They have a longer wavelength penetrate more
deeply into the dermis and damage collagen
elastin giving you the dry, leathery, wrinkly
look. UV-B think of B Burning are a
shorter wavelength cause sunburn. Both cause
melanoma, damage the DNA of the skin surface and
cause skin cancer.
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25 Cooperatives voluntary association of people
formed to carry on some kind of economic
activity benefiting members. Different Types of
Cooperatives 1. Producer Coop group of
farmers who join to get better prices for
their goods. They eliminate the middle-man
charges. 2. Housing Coop formed by members
to buy the building they live in. 3.
Purchasing Coop retail store owned and operated
by its customers. 4. Credit Union
members pool their savings so they can
borrow from it at lower rates (the most common
form of coop) 5. Service Coop provides
service to its members (electrical or
telephone) 6. Baby-Sitting Coop families
swap baby-sitting duties without ever
exchanging money. 26 Nonprofit Organizations
provides products without making a profit.
Churches are the most common. (Boy Scouts,
Y.M.C.A., Salvation Army, Goodwill)