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.