Chapter Eight

Business Organization

Copy This DownType of Business

Characteristics Advantages Disadvantages

Sole Proprietorship

Partnership

Corporation

The Three Types of Business OrganizationSole ProprietorshipPartnershipsCorporations

Sole Proprietorship If you alone own

and control the service.

Opportunity Benefits of Sole Proprietorships

Easy to open or CloseOwner has direct controlSmall initial investmentFreedom and controlOwner receives all profitsOwner can dissolve

business when necessary.

                                            

Opportunity Costs of Sole Proprietorships

All losses are borne by owner

Difficulty in raising financial capital Limited growth potential

Only one person in authority

Lack of longevity/Limited life

Unlimited liability

Two Terms with Sole ProprietorshipLimited life- a situation where a

business closes if the owner dies, retires, or leaves for some other reason.

Unlimited liability- a business owner is responsible for all the businesses losses and debts.

Mary Kay AshDirect sales until a man she trained

got a promotion that was hers.Son Richard and nine beauty

consultantsStarted: $5000 (personal money)Sales in 1964: $198,000 1965:

$800,0002.5 billion in 2009, 35 markets world

wide

Partnerships A business owned

and controlled by two or more people.

                                                        

REMEMBER! Partnerships don’t

have to be just two people.

JC Penney: The man with a thousand partners.

Three forms of partnerships General Partnerships: Equal

decision making. Limited Partnerships: Partners

join as investors, offering capital, but little, if any, role in decision making. VENTURE CAPITALISTS

Limited Liability Partnerships: All partners are limited partners

Advantages of Partnerships Easy to open/close Few regulations Two or more individuals own the

business. Specialization

Losses are shared by partners. More money is available to invest

in business Sharing management

responsibilities Taxes are shared by partners

Disadvantages of Partnerships

Unlimited Liability Division of authority Difficulty in raising

additional capital. Lack of longevity. Legal complications

when there is a change in ownership.

CorporationsBusiness owned by stockholders who

own the rights to the company’s profits but face limited liability for the company’s debts and losses.

Corporations Legally distinct from

their owners and treated as if individuals. Corporations can

Own property Hire workers Make contracts Pay taxes Sue and be sued Make and sell products.

Advantages of CorporationsLimited liability.Easy to raise needed

capital.Business owned by a group

of individuals.Responsibilities for running

the business divided among many individuals

Easy change in ownership and business continues as long as it makes profits. – LONGEVITY.

Disadvantages of Corporations

Corporate charters are $$$

Federal and state govts. monitor corporations more.

***Slow process of decision making.

Loss of control

What kind of companies are organized as corporations?USUALLY – food, steel, oil companies

are corporations. Insurance companies, supermarket

chains, major companies.

Forming a corporation When expansion

calls for more than adding more partners.

GET A LAWYER!

Forming a corporation: Lawyer applies for a

state license: ARTICLES OF INCORPORATION.

Reviewed by state officials. If all in order they grant CORPORATE

CHARTERS

Corporate Structure The corporate

charter identifies the officers. Chairman of the

board – symbolic head of the corporation.

CEO – Chief Executive Officer – the REAL power.

Corporate Structure Board of Directors –

people from inside or outside the company. Key decision making

body. Decide on product lines. Hires / fires corporate

officers to do the day-to-day running of the corporation.

Sees that boards policies are carried out.

Corporate Finances Most common way

to raise money is selling STOCK. STOCK – represents

ownership of the firm.

Ownership is issued in portions called SHARES.

Corporate finances If you buy 100

shares of stock in a company, you own 100 pieces of that company. If that company has a total of 10,000 shares available – you own 1% of the company.

Why own stock? DIVIDENDS – profits

on your investment. PREFERRED

STOCK – guarantees dividends.

COMMON STOCK – potential for dividends.

Why own stock? SOMETIMES can

make more money for you.

The “fun” of being involved with a corporation or a product.

Corporation Key termsPublic company- issues stock that can be

publicly tradedPrivate company- controls who can buy

or sell its stock

Benefits for stockholders Flexibility of

ownership. Limited liability.

Can’t be sued for corporate problems.

If the corporation folds, you only lose what you invested.

Private assets can’t be seized.

The trade-off Common stock

ownership allows a “voice” on how the company is run.

Preferred stock does not.

IMPORTANT ADVICE TO FUTURE CORPORATE HEADS!!!

ALWAYS hold or directly control 51% of your company’s stock.

OR have a lack of control at annual shareholder meetings.

You can lose your job!

Other disadvantages! If you own stock,

corporate profits are taxed twice. You pay taxes as

being a member of the corporation.

You pay taxes on the profits / dividends you take.

The corporation raises money If there are

thousands of shareholders, there is enormous amounts of money through the sale of stock.

eBay has 6,643,058 shares available.

Other ways corporations raise $$. Corporate bonds.

You loan your money to the company.

You DO NOT own the company.

Repaid the principal and the interest.

Principal – the actual money borrowed.

Interest – the price you gave to that principal.

Example of Corporate Bonds You hold a 1 year

$1,000 bond. At the end of the

year you are paid back the $1,000 principal AND the 5% ($50) interest.

Corporate Combinations Most corporations

seek to expand. Build new facilities Legally combines

with another enterprise.

MERGERS!

Three types of Mergers (corporate combinations) Horizontal Vertical Conglomerate

Horizontal Combination Buying up

companies involved in the same industry.

THINK STANDARD OIL – John D. Rockefeller.

Horizontal combinations All the companies

merging do the same thing.

Standard Oil: all the companies Rockefeller bought, processed oil into gas.

Vertical Combination A merger between

two or more companies involved in different production phases of the same good or service.

THINK US STEEL / Andrew Carnegie.

Conglomerate Combinations. Merger of

companies producing unrelated products.

Subsidiaries. Started in the

1960s.

Acme Brick Company International Dairy Queen, Inc. Applied Underwriters Iscar Metalworking Companies Ben Bridge Jeweler Johns Manville Benjamin Moore & Co. Jordan's Furniture Berkshire Hathaway Group Justin Brands Berkshire Hathaway Homestate C

ompanies Larson-Juhl BoatU.S. Marmon Holdings, Inc. Borsheims Fine Jewelry McLane Company

Buffalo NEWS, Buffalo NY Medical Protective Burlington Northern Santa Fe Cor

p. MidAmerican Energy Holdings Co

mpany Business Wire MiTek Inc. Central States Indemnity Compan

y National Indemnity Company Clayton Homes Nebraska Furniture Mart CORT Business Services NetJets® CTB Inc. The Pampered Chef®

Fechheimer Brothers Company

Precision Steel Warehouse, Inc.

FlightSafety RC Willey Home Furnishings Forest River Richline Group Fruit of the Loom® Scott Fetzer Companies Garan Incorporated See's Candies Gateway Underwriters Agency Shaw Industries GEICO Auto Insurance Star Furniture

General Re TTI, Inc. Helzberg Diamonds United States Liability

Insurance Group H.H. Brown Shoe Group Wesco Financial

Corporation HomeServices of

America, a subsidiary ofMidAmerican Energy Holdings Company

XTRA Corporation

Opportunity Benefits of Combinations Efficiency –

centralized decision making.

Potential lower costs.

Easier to acquire financial capital.

Opportunity Costs of Combinations Can lead to

unemployment (don’t need to double the jobs)

Reduced competition in the market place. MONOPOLIES.

Franchises One company

agrees – for a fee – to let another person or group set up a FRANCHISE. Have to uphold the

reputation of the parent company.

Get training and advertising.

Cooperatives Co-ops –

businesses owned by their members. Membership gives

privileges.

Three types of cooperativesConsumer- they require some kind of

membership payment Sam’s Club

Service- offer members a service Credit unions

Producer- owned/ operated by producers Agricultural products

Nonprofit Organizations Does not focus on

financial gain and profits.

Business organization but pursues other goals.

Income isn’t taxed.

That’s It!