Business Organizations

Learning Objectives

• Distinguish between different types of business organizations

• State the advantages and disadvantages of different types of BO

Types of Firms• Sole proprietorship – a business owned and run by one

person.

• In 2000, 73% of all businesses in the U.S. were sole proprietorships.

• Advantages of sole proprietorships:

-easy start-up

-flexible (can make decisions quickly) management is all you

-the profits are yours

-you are your own boss

-no business taxes; all income for you

-easy exit pay your bills and stop working

Disadvantages of sole proprietorships-unlimited liability you are responsible for everything

-it’s hard to borrow money

- Size and efficiency—you have to do everything yourself. You may be good at some things (making the product) but not at others

(keeping the financial records, doing the insurance paperwork)

-limited management experience

-hard time finding qualified employees

-limited life – business dies when you die

Discussion

• With your partner, discuss the advantages and disadvantages of sole proprietorship

Partnerships• Partnerships – business jointly owned by two or

more persons.

• In 2000, partnerships accounted for 7.1% of business organizations in the U.S.

• There are two types of partnerships:

*general partnerships – all partners actively run the business

*limited partnership – at least one partner is not active in running the business and has limited responsibility for the debts & obligations of the business.

Forming a Partnership

• It’s sort of like getting a marriage pre-nup.

• Legal papers are drafted that specify:

-how profits are divided.

-how new partners may join.

-how property is divided if the partnership ends.

WarningWarning You are responsible for the debts of your partners!

Advantages of partnerships:

-easy to start

-easy to manage

-you get your share of the profits

-can attract financial capital easier than sole proprietorships

-larger, so some economies of scale present

More efficient operations (people can specialize)

-easier to attract qualified employees

Disadvantages of partnerships:

-responsible for the acts of all the other partners

-if you are a limited partner, not involved in daily activity, you only lose your original

investment

- limited life when a partner dies or leaves, it ends. It must be dissolved legally and

reorganized with the remaining partners. (They usually want to keep the old name.)

-conflict between partners

-bankruptcy – if you’re not a limited partner, you have to pay any debts!

Discussion

• With your partner, discuss the advantages and disadvantages of Partnership

Corporations

• Corporation – a form of business organization that is recognized by the law as having all

the legal rights of an individual.

• They have the right to buy & sell property, enter into legal contracts, and to sue & be sued.

• In 2000, corporations were 19.9% of business organizations, but were responsible for

88.8% of all sales.

Corporations

• Forming a Corporation:• File for permission from the federal (national) government or the state where your

HQ will be• “charter” is granted: states name, address, purpose, number of shares of stock, etc.• Sell stock (“IPO”) at an initial price• Stock value goes up and down according to your profitability• Issue dividends (hopefully)

• Corporate Structure:

Stock?

• Stock – a certificate of ownership in a firm.

• Stockholders – a.k.a. – shareholders – investors in a corporation (they own stock).

• The money from the stockholders (investors) is used to set up the firm. This money is called financial capital.

Types of Stock

• Common stock – basic form of ownership in a corporation. Each share is worth one vote for the board of directors, who run the company.

• Preferred Stock – non-voting shares of stock, but these shareholders receive profits before common stockholders.

Figure 3.3Ownership, Control, and Organization of a Typical Corporation

Advantages of Corporations• Easy to raise financial capital

1.) sell stock

2.) issue bonds a written promise to repay the amount borrowed in the future

• Hire professional managers

• Limited liability for the corporation’s owners: the corporation itself is responsible for all debts, not the owners. If it goes out of business, stockholders do not have to repay the

corporation’s debts.

• Unlimited life – the firm doesn’t die when a shareholder does.

Advantages of Corporations

• Ease of transferring ownership:

If you don’t want to be part owner any more, you just sell your stock.

Much easier than a sole proprietorship trying to find someone to buy the entire business.

Disadvantages of Corporations

• Difficult to start

• Shareholders have little say about how the business is run

• Double taxation – the firms profits are taxed and then the profit that is distributed to shareholders is also taxed.

• Subject to government regulation.

Disadvantages of Corporations

Corporations are subject to more government regulation than sole proprietorships and partnerships.

register with the state

register with the Securities & Exchange Commission—the SEC—to sell stock to the public

publish info on their sales and profits on a regular basis

get approval to buy or merge with other companies.

Discussion

• With your partner, discuss the advantages and disadvantages of corporations.

The Role of Government• The state governments began regulating

corporations in the mid-1800’s.

• Corporations in states with a lot of regulation moved to states with less, so as a result state regulations began to be lifted.

• In the early 1900’s, consumer groups demanded regulation of giant corporations.

• Regulations of electric companies, insurance companies, the phone company, and transportation companies (Railroads & Airlines)

Nonprofits• Firms use scarce resources to produce goods and

services in order to make a profit for their owners.

• Other organizations operate on a “not-for-profit” basis

• A nonprofit organization operates like a business to promote the collective interests of its members rather than to seek financial gain for its owners

Nonprofits

• Examples: schools, churches, hospitals, welfare groups, and adoption agencies.

• Many of these organizations are legally incorporated to take advantage of unlimited life and limited liability.

• They are similar to profit-seeking businesses, but do not issue stock, pay dividends, or pay income taxes.

• The profits they produce are used to further the goals of the group.

Goal of Cooperatives

• Cooperative - a voluntary association of people formed to carry on some kind of economic activity that will benefit its members.

• Producer and worker cooperatives are associations in which the members join in production and marketing and share the profits.

Cooperatives• The consumer

cooperative is a voluntary association

• They buy bulk amounts of goods such as food and clothing on behalf of its members.

• The goal is lower prices for members.