chapter seven business organization the three types of business organization ssole proprietorship...
TRANSCRIPT
Chapter Seven
Business Organization
The Three Types of Business OrganizationSole ProprietorshipPartnershipsCorporations
Sole Proprietorship If you alone own and
control the service.
Opportunity Benefits of Sole Proprietorships Owner has direct
control Small initial
investment Owner receives all
profits Owner 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 Unlimited liability
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.
Two 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
Advantages of Partnerships 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
Division of authority Unlimited liability. Difficulty in raising
additional capital. Lack of longevity. Legal complications
when there is a change in ownership.
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.
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.
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.
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.
BERKSHIRE HATHAWAY INC.
Acme Brick Company Johns Manville
Ben Bridge Jeweler Jordan's Furniture
Benjamin Moore & Co. Justin Brands
Berkshire Hathaway Group Larson-Juhl
Berkshire Hathaway Homestates Companies
McLane Company
Borsheim's Fine Jewelry MidAmerican Energy Holdings Company
Buffalo NEWS, Buffalo NY MiTek Inc.
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
Fruit of the Loom® Scott Fetzer Companies
Garan Incorporated See's Candies
GEICO Direct Auto Insurance Shaw Industries
GEICO Direct Auto Insurance
Shaw Industries
General Re Star Furniture
Helzberg DiamondsUnited States Liability Insurance Group
H.H. Brown Shoe GroupWesco Financial Corporation
International Dairy Queen, Inc.
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.
Cooperatives
Nonprofit Organizations Does not focus on
financial gain and profits.
Business organization but pursues other goals.
Income isn’t taxed.
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