Business Organizations

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Business Organizations

• 1. Sole Proprietorship - A business owned and
  operated by one person.
• Oldest, simplest, most common type
• Who owns SPs? (Internet advantages)
• Advantages of Sole Proprietorships
• Ease of start up
• Few regulations
• Full control
• Exclusive right to all profits

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Sole Proprietorships

• 1. Easy Start Up
• Require small amount of money
• Can set up in a short amount of time
• 2. Few Regulations
• Business License
• Site Permit (zoning laws)
• Register business name
• Obtain federal/state tax ID

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Sole Proprietorships

• 3. Full Control - You maintain complete
  control and can make fast and flexible decisions.
• Minimal paperwork, meetings, depends on YOU!
• 4. Profit - The owner (YOU) keeps all the
  profits.

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Sole Proprietorships

• Disadvantages
• Unlimited Personal Liability
• Limited Access to Resources
• Lack of Permanence

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Disadvantages of S.P.

• Unlimited Liability
• YOU are personally responsible for all business
  debts.
• YOU can also be sued personally for anything if
  the business is taken to court.

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Disadvantages Sole Proprietorships

• 2. Limited Access to Resources
• - Sole responsibility - YOU are
  responsible for ALL aspects of running your
  business. But are you an expert at all aspects of
  running a business?
• - Limited Growth Potential Difficult to
  expand or improve the business because banks are
  reluctant to give loans.
• CollateralAnything of value you pledge as
  security for a loan.

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Disadvantages of SP

• 4. Lack of Longevity - The length of a firms
  life or the amount of time the business operates.
• Ex. Your health / lifespan
• Ex. High turnover
• Ex. You lose interest in the business
• Ex. Your competence

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Partnerships

• PartnershipA business that is owned and
  controlled by two or more people.
• Ex. Small retail stores, restaurants, doctors,
  lawyers
• GeneralPartners enjoy equal decision making
  authority.
• LimitedPartners who provide capital() but do
  not play an active role in running the company.
  Liability is limited between partners.
• Limited Liability Partnership similar to
  general except partners not responsible for each
  others mistakes (limited liability between
  partners)

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Advantages of Partnerships

• Advantages of Partnerships
• Ease of start-up
• Financial Advantages
• Specialization / Shared decision making

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Advantages of Partnerships

• 1. Easy start up
• Few government regulations
• Costs tend to be low
• Partners usually develop a partnership contract
  but not required. Can distribute profits and
  responsibilities by choice.

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Advantages of Partnerships

• 2. Financial Advantages
• Shared Assets Partners can pool assets to
  start the business or make capital purchases.
• Improved ability to raise capital
  Banks are more likely to lend to partnerships
  because they have an increased amount of
  collateral.
• Shared Losses - The sharing of losses
  may enable a partnership to survive a situation
  that might cause a sole proprietorship to fail.

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Partnerships - Advantages

• 3. Shared Decision Making
• Specialization Specific business duties can
  be assigned to different partners based on
  expertise and individual talents.
• Ex. One good in salesother good in accounting
• Minimize mistakes - Partners can minimize
  mistakes by consulting with each other.
• Flexibility Can go on vacation, illness

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Disadvantages of Partnerships

• 1. Unlimited Liability - Each partner is
  personally responsible for debts incurred by the
  business. General partners can lose everything
  they own!
• If one partner refuses or is unable to pay for
  his share, then the other partners are still
  liable for the total debt.
• Other partners can lose based on the mistakes of
  one

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Disadvantages of Partnerships

• 2. Potential Conflicts Official partnership
  agreements deal with ownership percentages and
  technicalities such as profit and loss.
• However, other factors play an even bigger
  role
• Work habits, personalities, management styles,
  ethics, etc

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Disadvantages of Partnerships

• 3. Lack of Permanence - Life of the business is
  dependent on the willingness and ability of the
  partners to continue to work together.
• One partner cannot remain (die/illness) or
  decides that they no longer want to work in the
  partnership. What are the options?
• Find a new partner, buy the partner out, or
  close the business.

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Franchises

• Franchise - A semi-independent business that pays
  fees to a parent company. In return, the business
  is granted the exclusive right to sell a certain
  product or service in a given area.
• Examples Subway, Jiffy Lube, McDonalds, Palm
  Beach Tan, Home Again Senior Care

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Franchise Advantages

• Advantages
• Management training and support
• Standardized quality
• National advertising programs
• Financial assistance
• Centralized buying power

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Franchise Disadvantages

• Disadvantages
• High franchising fees and royalties
• Strict operating standards
• Purchasing restrictions
• Limited product line

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Corporations

• Corporations Companies that are formed as
  legally distinct from their owners and are
  treated as if they were individuals.
• Can Hire workers, make contracts, pay taxes, sue
  and be sued, make sell products.

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Forming a Corporation

• 1. Must apply for a state license known as the
  articles of incorporation.
• Includes name and purpose of corp.
• Address and headquarters
• Amount of it expects to raise
• Names and addresses of officers
• Length of time expected to exist
• License granted is called corporate charter

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Corporate Structure

• Structure
• Owners/Shareholders
• Board of Directors
• Corporate Officers
• Vice Presidents
• Department Heads
• Employees

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Corporate Finances

• Stock A certificate of ownership of the firm.
• Stockholders Individuals that own shares
• Shares - Portions of stock (certificates) issued.
• Dividends - Profits paid to shareholders.
• Common Stock - Allowed to vote. May or may not
  offer dividends
• Preferred Stock - Guaranteed dividends paid
  before common stock. No voting rights

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Corporate Finances

• Corporate BondCertificate issued by a
  corporation in exchange for money borrowed.
• PrincipalThe actual amount of money borrowed.
  Ex. Buy 10,000 _at_5 interest
• Principal10,000 X 5 500 per year income
• InterestAmount borrower must pay for the use of
  the principal.

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Advantages of Corporations

• Advantages to stockholders
• 1. Limited Liability Can lose only the amount
  they invested in the business. No personal assets
  can be touched.
• 2. Transferable - Can sell their shares at any
  time

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Advantages of Corporations

• Advantages for the Corporation
• 1. Capital can be raised easily (bonds, issuing
  shares)
• 2. Separation of ownership from management.
• - Owners need no skills. Can hire
  experts.
• 3. Longevity
• Businesses can live indefinitely
  since ownership is transferable and owners are
  not running day to day operations.

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Disadvantages of Corporations

• Difficulty and expense of startup-
• Corporate charters involve a
  complicated legal process
• Double Taxation

Corporation pays taxes on profits
Corporation pays stockholders dividends
Stockholders pay income tax on dividends
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Disadvantages of Corporations

• 3. Loss of control / Slow decision making process
• - Owners have little control of decision
  making. Corporate officers (management) and/or
  Board of Directors may make decisions in their
  own self-interest that do not benefit owners.
• - Major corporate decisions are delayed by the
  voting process and meeting times of the Board of
  Directors

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Disadvantages of Corporations

• 4. Government Regulations
• Have far more and stricter laws
• Example Must file quarterly and annual
  earnings reports to the SEC (Securities and
  Exchange Commission)

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Limited Liability Corporation LLC

• Advantages
• Limited Liability
• No Double Taxation
• Disadvantages
• Almost none
• Most popular form of small businesses now