Ch. 8: Business Organizations

Business Brainstorm

• Think of your business, would you want to own it by yourself, or with others? – What are the pros/cons of each option?– If shared ownership, in what structure?

Section 1: Sole Proprietorships

• Small, family-owned businesses have long served as the foundation to America’s economy.

Business Organization

• A business organization is any establishment formed to carry on commercial activity.

Liability vs. Rewards

• Liability is the legal obligation to pay bills and take responsibility for something.

• Rewards are the benefits/profits received from businesses. – We will categorize businesses according to who is

liable/rewarded for them.

Sole Proprietorship

• A sole proprietorship is a business owned and managed by a single individual.

Sole Proprietorship

• Owners of sole proprietorships hold all of the liability & benefits of the business.– A majority of the businesses in America (75%)– Account for a minority of the total sales (6%)

Start-Up

• Sole proprietorships are relatively easy to start.• Most require minimal legal requirements.

Legal Requirements

• Business License: Authorization from local government

• Site Permit: certificate of occupancy for a building (if not based at home)

• Name: businesses must register their name• Zoning Laws: Cities and towns designate

separate areas for different uses.

Advantages and Disadvantages

• Sole responsibility: • Requires a high degree of initiative and energy– Receive all rewards (profits) – Responsible for all liability (potential loss)

Section 2: Partnerships

• A partnership is any business organization owned by two or more people who divide ownership (responsibility, and profit/liability)

General Partnership

• Partners in general partnership share equally in both responsibility and liability.

Limited Partnership

• Only one partner is required to have unlimited personal liability.

• One or more partners may be limited.– They do not actively manage the business.– Can only lose the amount of money the invested.

Limited Liability Partnership (LLP)

• Recognized by many states, all partners have limited liability in the event of extreme mistakes or problems.– Attorneys, physicians, dentists, accountants

Advantages of Partnership

• Relative ease of start-up• Shared decision making and responsibility• Specialization: each partner may have different strengths• Larger pools of capital/assets

Disadvantages of Partnerships

• Unlimited liability– Unless an LLP, at least one partner has unlimited liability

• Potential for conflict– Minority owner can get run over

Section 3: Corporations, Mergers, and Multinationals

• Increasingly, American business is controlled by large, multinational corporations.

Corporations

• A corporation is a legal entity owned by individual stockholders who face limited liability for the firm’s debt.

Stock

• Corporations are owned by anyone with stock in the company.

• Stock is a certificate of ownership in a company.

Private Corporations (closely held)

• Some corporations are incorporated, but only issue stock to select people.

• Stock is rarely traded and is often held within families.

Publicly Trade Corporations

• Publicly held corporations are traded on the open market (Ex: New York Stock Exchange).

• Anyone can buy shares in a publically traded company.

Advantages of Incorporation

• Limited liability• Easily transferable ownership• Ability to attract large amounts of capital• Long life

Disadvantages of Incorporation

• Expense and difficulty of start-up• Double taxation• Potential loss of control by founders• More requirements and regulations

Horizontal Mergers

• Horizontal mergers are when two companies competing in the same market merge together.

• Chrysler + Daimler-Benz = DaimlerChrysler

Vertical Merger

• Vertical mergers combine two or more firms involved in different stages of producing the same good.

• Owning the natural resource mining, transportation, and manufacturing of the a product.

Conglomerates • Conglomerates merge more than three businesses

that make unrelated products. – Kraft Foods– Time Warner– Coca-Cola

Multinational Conglomerates• Multinational conglomerates operate and sell all of

the world. – Coca Cola CEO: "We are not an American company. We are

an international company that happens to be based in Atlanta, Georgia."

Section 4: Other Organizations

• Franchises, nonprofit organizations, and cooperatives are other forms of business structures.

Business Franchise

• A franchise is a semi-independent business that pays fees to a parent company in exchange for using their brand.

Advantages to Franchises• Management training and support• Standardized quality• National advertising/brand recognition • Financial assistance • Centralized buying power

Disadvantages of Franchises

• Franchising fees and royalties• Strict operating standards• Purchasing restrictions• Limited product line• Summary: Limited freedom

Cooperative Organizations

• A cooperative is a business owned and operated by a group of individuals for shared benefit.

• Example: Farm cooperative

Nonprofit Organizations

• Nonprofits operate like businesses, but do not operate to generate a profit.

• Education, hospitals, social work agencies, Churches, YMCAs, museums, etc.

Professional and Business Organizations

• Professional organizations are resources for a given occupation– National Education Association, American Medical

Association

• Business Associations are resources for local businesses– Better Business Bureau