CH. 9: Business Organizations

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CH. 9 Business Organizations

1. Sole Proprietorships
2. Partnerships
3. Corporations and Franchises

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ENTREPRENEUR

• Person willing to take the risk and start a
  business

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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

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ADVANTAGES of SOLEPROPRIETORSHIP

• 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

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KEY TERMS

• ASSETS What you OWN!
• LIABILITIES What you OWE!

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DISADVANTAGES of SOLEPROPRIETORSHIP

• 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

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PARTNERSHIP

• A business that two or more individuals own and
  operate
• Account for
• 5 of annual sales
• 15 of businesses

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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

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DISADVANTAGES of PARTNERSHIPS

• More difficult to form dissolve
• Communication between owners employees isnt 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 cant
  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)

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LIMITED PARTNERSHIP

• Special form of partnership
• GENERAL PARTNER
  --manages firm
• --has full responsibility for firms 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

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JOINT VENTURE

• A temporary partnership
• Set up for a specific purpose
• For a short period of time

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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

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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 hes
  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

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DISADVANTAGES of CORPORATIONS

• DECISION MAKING can be slow and complicated
  (Board of Directors must vote)
• PRINCIPAL-AGENT PROBLEM managements interests
  and the STOCKHOLDERS interests arent always the
  same
• PROFIT IS DOUBLE TAXED
• CORPORATE PROFIT TAX Federal govt and some
  state local govts 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

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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

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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 McAllisters Deli

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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

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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

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Celler-Kefauver Act

• 1950
• Prohibits any type of merger that gives merging
  firms an unfair advantage in the marketplace
  (MONOPOLY)

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INFO. on STOCKS

• Types
• Benefits and risks
• Primary and Secondary Markets
• COMING SOON !!! Well cover these when we talk
  about FINANCING A BUSINESS!