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 corporationshared decision-making and profitsunlimited 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 PresidentMarketing

Supervisor

Vice PresidentProduction

Dept.Mgr

Vice PresidentR & D

DirectorOf Personnel

Vice PresidentPersonnel

CEO(President)

Treasurer

Board of Directors(Chairperson)

Stockholders

Corporations20%

Partnerships7%

SoleProprietorships

73%

Partnerships 6%Sole Proprietorships 5%

Corporations89%

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 liabilityNot a corporation – pass through entity to person(s) who own it – no double taxation

FranchisesFranchiserFranchisee

Non - Profit Organizations

Churches & Religious organizations

Charitable Organizations - United Way – American Red Cross

Non - Profit Organizations

Cooperativesconsumer/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 Food Conglomerate