Chapter 3

Business Organization

3 Types of Organizations

• Sole Proprietorship

• Partnership

• Corporation

Sole Proprietorship

• Businesses owned and run by a single

individual

• Easiest form of business to start

Examples: lemonade stand, lawn mowing

Sole Proprietorship

Advantages:

• You’re your own boss.

• easy to start,

• easy to manage,

• owner can keep all the profits without sharing with other owners,

• doesn't have to pay separate business income taxes, determine own hours,

• easy to get out of business.

Sole Proprietorship

Disadvantages:

• owner has UNLIMITED LIABILITY!!! (full

responsibility for all losses, debts, and failures),

• difficult to raise financial capital,

• size might make it inefficient,

• owner may have limited managerial experience or

financial funds

• difficult to get experienced employees,

• limited life span in the business.

Partnership

Businesses jointly owned and run by two or more

people

• General Partnership: all partners share

responsibilities

• Limited Partnership: at least one partner isn't

active in daily business activities

• Examples: law firms, physician's groups,

architectural firms

Partnership

Advantages:

• easy to start,

• easy to manage,

• lack of special taxes on partnership,

• easy to get financial capital (you have a partner),

• more efficient daily operations (ownerships can

share the work load),

• easier to attract talented workers

Partnership

Disadvantages• In General Partnerships, each partner is fully

responsible for actions of other partners.

• In Limited Partnerships, a partner's responsibility for

debts depends on size of his/her investment in the firm.

• Limited life span in the business. Potential conflict

between partners.

lack of resources compared to corporation

shared decision-making and profits

unlimited liability

Corporations

• Form of business recognized by law as a separate

legal entity with all the rights of an individual

• Have to file for permission with federal or state

government to create

• Partially owned by stockholders (investors who

buys ownership certificates in the firm)

Examples: Ford, GM, ABC, NBC

Corporations

Advantages• easy to raise financial capital (can sell stocks to

investors, can borrow money by issuing bonds

that it will repay with interest),

• limited liability for owners,

• directors can hire professional managers to run

the firm,

• unlimited life,

• easy to transfer ownership (stockholders can sell

their stocks)

Corporations

Disadvantages:

• double taxation of profits (corporation pays taxes

on its profits and stockholders pay taxes on

money made),

• difficult and expensive to get a corporation charter,

• owners/stock shareholders have little to no voice

in how business is run, (Even with majority stock)

• subject to more government regulation.

Typical

Corporation

Secretary

Dept.

Mgr

Vice President

Marketing

Supervisor

Vice President

Production

Dept.

Mgr

Vice President

R & D

Director

Of Personnel

Vice President

Personnel

CEO

(President)

Treasurer

Board of Directors

(Chairperson)

Stockholders

Corporations

20%

Partnerships7%

Sole

Proprietorships

73%

Partnerships 6%

Sole Proprietorships 5%

Corporations

89%

Percentage of Firms Percentage of Sales

Corporations

60%

Percentage of

Employed

Sole Prop. & Part.

40%

Define:

In Chapter 3 Section 1 define the following terms:

Limited Liability Company

LLC – limited liability

Not a corporation – pass

through entity to person(s)

who own it – no double

taxation

Franchises

Franchiser

Franchisee

Non - Profit Organizations

Churches & Religious

organizations

Charitable Organizations - United

Way – American Red Cross

Non - Profit Organizations

Cooperatives

consumer/purchasing -

wholesale clubs

producer/marketing -

agriculture

Non - Profit Organizations

Cooperatives consumer/purchasing - wholesale clubs

producer/marketing - agriculture

service - credit unions, insurance, HMO, child care (fastest growing)

industrial/esops – more common in Europe

Coke fields

Iron ore deposits

Steel mills

Ships

purchased by Carnegie

purchased by Carnegie

purchased by Carnegie

purchased by Carnegie

Coke fields

Iron ore deposits

Steel mills

Ships

Railroads

purchased by Carnegie

purchased by Carnegie

purchased by Carnegie

purchased by Carnegie

purchased by Carnegie

Coke fieldspurchased by

Carnegie

Coke fields

Iron ore depositspurchased by

Carnegie

purchased by Carnegie

Coke fields

Iron ore deposits

Steel mills

purchased by Carnegie

purchased by Carnegie

purchased by Carnegie

GMGeneral Motors

Assembly

Manufact-

uring

Refining

Mining

Transportation

GMGeneral Motors

FordChrysler

Disadvantages of Bigness• impersonal

• waste of resources/pollution

• development of monopolies

• insecurity of workers

•Conglomerates – next slide

•Cost/benefit analysis - ahead

Economy of Scale

Soft Drink

Gasoline

Clothing

Parent

Company

Bakery

Sporting

Goods

Fast FoodConglomerate