Forms of Business OrganizationBY : MR KIRANPAL SINGH

Sole ProprietorshipsBusiness owned (and usually operated) by one personSimplest form of business ownership Most popular form of business organization 72.2% of allMost common in:RetailingServiceAgriculture

Sole Proprietorship -- AdvantagesEase of StartupLittle legal documentationNo co-owners to consultLeast expensive to startPride of OwnershipRetention of profitsFlexibilityNo Business Income Tax

Sole Proprietorship -- DisadvantagesUnlimited LiabilityLimited Life Business ends when owner leaves the businessLimited Access to Start-up CapitalLimited Access to Credit Limited Management ExpertiseDifficulty in Hiring EmployeesProprietor not considered an employee

PartnershipsTwo or more owners Least numerous form 7.7% of all businessesPartnership AgreementSpecifies rights and obligations of partnersIf written, called the Articles of Partnership (Articles of Co-partnership)

Partnership -- AdvantagesGreater Access to CapitalGreater Access to CreditRetention of ProfitsMore Management ExpertiseNo Business Income Tax

Partnership -- DisadvantagesShared ProfitsUnlimited Liability for General PartnersEach partner has Agency powerLimited LifeBusiness ends when any partner withdrawsManagement DisagreementsFrozen Investment

Types of PartnersGeneral PartnerUnlimited LiabilityAssumes Management RoleLimited PartnerLiability limited to InvestmentMay not take active managerial roleEvery partnership must have at least one general partner

Types of PartnersGeneral PartnershipAll partners are general partnersLimited PartnershipOne or more limited partnersMaster Limited PartnershipOwned & managed like a corporationTaxed like a partnershipShares may be sold

CorporationsGenerally larger than other forms (Except for S-Corporation)20.1% of all U.S. BusinessesAccount for 87.1% of all U.S. Business IncomeConsidered a separate legal entityOwners called Stockholders or ShareholdersOwnership evidenced by Stock CertificateGoverned by Board of Directors

Corporations -- AdvantagesLimited LiabilityEase of Ownership TransferUnlimited LifeGreater Access to CapitalSpecialized Management Expertise

Corporations -- DisadvantagesMore difficult & costly to formRequires a Corporate CharterSubject to greater governmental scrutinyDiluted earningsDouble taxation

Corporations vs. Sole Proprietorships SPCorpIncome$1,000,000 $1,000,000Expenses 500,000 500,000EBT $500,000 $500,000 (Assume Business Tax Rate = 50%)Business Tax 0 250,000Net Profit $500,000 $250,000(Assume a 30% Personal Tax Rate)Personal Tax 150,000 75,000$ to Owners $350,000 $175,000

Corporate CharterLegal Permission to Operate as a CorporationIssued by stateMay not conduct business as a corporation without a charter

Contents of a Corporate CharterCompany Name & AddressNames & addresses of IncorporatorsPurpose of the CorporationMaximum amount of stock & Classes of Stock to be issuedRights & Privileges of stockholdersLength of time the corporation is to exist

Stockholder RightsCommon StockVotes in corporate mattersOne vote per share ownedPreferred StockNo voting rightsDividend claims are paid 1st DividendDistribution of earnings to the stockholders of a corporation

Organizational Chart

Types of CorporationsGovernment-Owned Corporationaka Public CorporationOwned & operated by governmentPost office, NASA, FDICQuasi-Government CorporationAka Quasi-Public CorporationPrivately owned, government controlled monopolyPublic utilities, Fannie Mae, Freddie Mac, Sallie Mae Private CorporationOwned by individuals or other companies

Types of CorporationsNot-For-Profit CorporationOrganized to provide a social, educational, religious, or other serviceHabitat for Humanity, Red CrossFor-Profit CorporationClosed CorporationStock owned by relatively few peopleStock not sold to general publicOpen CorporationStock is bought and sold on security exchangesCan be purchased by any individual

Mergers & AcquisitionsHostile takeoverTypes of mergersHorizontal: Similar products / servicesVertical: Different but related firmsConglomerate: Completely different industries Merger TrendsDivestitureLeveraged Buyout (LBO)

FranchisingFranchise License to operate an individually owned business as though it were part of a chain of outlets or storesThe business itself FranchisingActual granting of a franchise

FranchisingFranchisorSupplies a known & advertised business nameSupplies management skillsSupplies training & materialsSupplies method of doing businessFranchisee:Supplies labor & capitalOperates the franchised businessAgrees to abide by the franchise agreement

Franchising AdvantagesFranchisorFast, Selective DistributionMotivated FranchiseeFranchiseeOpportunity to start a business Business Experience of othersNationally recognized nameNational promotional campaigns

Franchising DisadvantagesMainly from Franchisees Viewpoint:Franchisors contract can dictate every aspect of the businessPay for securityLong hoursCompetition from same company