CHAPTER 3: BUSINESS ORGANIZATIONS

Section One: Forms of Business Organization

I. Forming a Proprietorship Easiest form of business to start-needs

only the occasional licenses and fees Ease of start up Relative ease of management Decisions can be made quickly

Proprietorship Advantages Owner enjoys the PROFITS of

successful management without having to share

No separate business income taxes Not recognized as a separate legal entity Owner must pay individual income taxes

on profits Business is exempt from any tax on the

income Psychological satisfaction Easy to get out of business

Proprietary Disadvantages Unlimited liability

Owner is personally and fully responsible for all loses and debts of the business

If business fails, the owner’s personal possessions may be taken away to satisfy business debts

Difficult to raise capital Personal financial resources are limited

Size and efficiency: Inventory is any unused stock of finished goods/parts in reserve

Proprietary Disadvantages Limited Managerial Skills Difficulty of attracting qualified

employees Fringe benefits- Employee benefits such as

vacation, sick leave, retirement, medical, and health insurance may not be available

Limited lifespan: The firm legally ceases to exist when the owner dies, quits, or sells the business

II. Partnerships Owned by 2 or more persons Least numerous business organization Smallest proportion of sales and net

income

Types of Partnerships General Partnership: All partners are

responsible for the management and financial obligations of the business.

Limited Partnership: At least one partner is not active in the daily running of the business, although he or she may have contributed funds to finance the operation

Ex. www.evangelinecafe.com

Forming a Partnership Relatively easy to start Articles of Partnership: Formal legal

papers which specify arrangements between partners

Advantages of Partnerships

Ease of start up. Articles of Partnership involves attorney

fees and filing fee for the state. Ease of management: Each partner

usually brings different areas of expertise to the business.

Lack of special taxes: Partners draw profits from the firm and then pay individual income taxes at the end of the year

Advantages of Partnerships Usually attract financial capital

more easily than a sole proprietorship

Slightly larger size = greater efficiency

Lawyers, doctors, accountants Usually attract top talent to their

organizations

Disadvantages of Partnerships Unlimited Liability: Each partner is

fully responsible for the acts of all partners

Limited Partnership: The limited partner has limited liability Investor’s responsibility for the debts of the

business is limited by the size of their investment in the firm

If business fails with a large debt, the limited partner (investor) only loses their original investment, leaving the general partners to make up the rest

Disadvantages of Partnerships Limited Life: When a partner leaves or

dies, the partnership must be dissolved and reorganized. The new partner may try to keep an

agreement to keep its name Potential for Conflict: “Why can’t we

all just get along?”

III. Corporations

Defn: A form of business organization recognized by law a a separate legal entity having all as an individual. Can buy & sell property Enter into legal contracts and sue and

be sued Account for 1/5 of the firms in the US Account for 90% of all sales Ex:

http://www.timewarner.com/corp/businesses/index.html

Forming a Corporation

Very formal and legal arrangement Incorporation (or forming a

corporation) must file for permission from the state where business will have be headquartered

Charter: A government document that gives permission to create a corporation if approved States the company name, address,

purpose of business, and the number of shares of stock, or ownership certificates, within the firm

Forming a Corporation, continued

Shares of stock are sold to investors called…

stockholders, or shareholders.

$$ is then used to set-up corporation (remember “Tucker” DVD)

A check, or dividend, is paid to shareholders if the corporation is profitable

Corporate Structure: Common Stock

Investors become owners with certain ownership rights, depending on type of stock purchased:

Common Stock: Basic ownership of corporation Owner usually receives 1 vote for each share of

stock Used to elect board of directors who direct the

corporation’s business by setting policies/goals The Board hires a professional management

team to run the business on a daily basis

Common Stock

The dividend is variable and common stock shareholders are the last to receive a dividend or get their $$ back if corporation fails.

Preferred Stock

Nonvoting ownership shares of a corporation

These shareholders receive dividends first and they are fixed If there are funds or property left after a

business fails, preferred stockholders get their investment back first!

Preferred stockholders cannot elect the board of directors-THEY CANNOT VOTE!!

Advantages of the Corporation Ease of raising financial capital Need more capital?

Sell additional stock Borrow $$ by issuing bonds: Written

promise to repay the amount borrowed at a later date

Principal: Amount borrowed to be repaid later

Interest: The price paid by the corporation for the use of another’s $$

Advantages of the Corporation

Ease of finding professional managers

Limited liability for its owners Corporation is fully responsible for its

debts and obligations **Because limited liability is so

attractive, many firms incorporate just to take advantage of it

Advantages of the Corporation

Unlimited life: Corporation continues to exist even when ownership changes Because the corporation is a legal entity,

the name of the company remains the same, and the corporation continues to do business

Ease of transferring ownership: If a shareholder no longer wants to be an owner, they can sell the stock

Disadvantages of the Corporation

Difficult to get a charter Depending on the state, attorneys’ fees

and filing expense can cost several thousand $$

Owners/shareholders have little say in business affairs after voting for board of directors

Double Taxation: Corporate profits Stockholders’ dividends are taxed twice:

once as corporate profit and again as personal income

Disadvantages of the Corporation

Lots of Government regulation: Register with state where the Corp. is

chartered To sell stock to the public, the Corp.

must register with the Securities and Exchange Commission

Provide detailed financial statements on regular basis to the general public

When taking over another business, the Corp may require federal approval

Government and Business Regulation

Business Regulation: In the 20th century, various consumer groups demanded regulation of giant corporations.

Federal and state governments responded by passing stronger regulations.

Rigorous regulations for banks, insurance companies, electricity, telephone, and transportation

Ex?, Sherman and Clayton Anti-trust Acts, FDIC, Federal Reserve, FCC, Dept. of Transportation

Government and Business Regulation

Business Development: States try to attract new industry. Offer tax credit or a reduction in taxes for a business to move to a state

Examples in TX? www.governor.state.tx.us/ecodev/