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Chapter 8: Business Organizations

Section 1: Sole Proprietorships

Vocabulary:

sole proprietorship – a business owned and managed by a single individual

business license – authorization to operate a business issued by a local government

zoning laws – laws in a city or town that designate certain areas, or zones, for residential and business use

liability – the legal obligation to pay debts

fringe benefits - payments to employees other than wages or salary

Chapter 8 Section 1 Notes

What are the risks and benefits of a sole proprietorship?

Sole proprietorships are easy to start and when you are the sole owner, you receive all of the profits from the business. ‘’on the other hand, you have total liability for the company and could lose your investment as well as other personal property if the business fails.

The Role of Sole Proprietorships

A sole proprietorship is a business owned and managed by a single individual. In this type of business organization, the lone entrepreneur earns all of the firm’s profits and is responsible for all its debts. More than 70 percent of all businesses in the United States are sole proprietorships but they are small. Generating only 4 percent of all U.S. sales.

Entrepreneurs

The potential to make a profit is a big incentive for entrepreneurs to start a sole proprietorship. Entrepreneurs must be willing to assume total responsibility and take risks. A successful entrepreneur is optimistic, enthusiastic, and focused on the future.

Chapter 7: Market Structures of 11

Characteristics of Proprietorships

Advantages

Sole proprietorships have many advantages, including: they are easy to start – there is only a small amount of paperwork and legal expense; there are minimum requirements – sole proprietorship needs only a business license, a state permit if not working out of their home, and a name for their business; there are few regulations – sole proprietorships are the least regulated proprietorships and the least regulated form of business organization, (however they are subjected to zoning laws, which may prohibit them from working out of their homes); they are the sole receiver of profit – the owner gets to keep all of the profits after paying income taxes; and sole proprietorships have full control – a high level of freedom allows sole proprietors to run their company as they wish.

What are the disadvantages of a sole proprietorship?

Unlimited liability – sole proprietorships are fully and personally responsible for all their business debts; and limited access to resources – sole proprietorships must buy all the necessary resources they need to run their business, which can be very expensive; they lack human capital; and demands on a sole proprietorship can be personally and financially exhausting.


Lack of Performance

Sole proprietorships often have trouble finding and keeping good employees because they do not have the ability to offer fringe benefits.

Section 2: Partnerships

Vocabulary:

partnership – a business organization owned by two or more persons who agree on a specific division of responsibilities and profits

general partnership – a type of partnership in which all partners share equally in both responsibility and liability

limited partnerships – a type of partnership in which only one partner is required to be a general partner

limited liability partnership (LLP) – a type of partnership in which all partners are limited partners

articles of partnership - a partnership agreement that spells out each partner’s rights and responsibilities

assets – the money and other valuables belonging to an individual or business

business franchise – a semi-independent business that pays fees to a parent company in return for the exclusive right to sell a certain product or service in a given area

royalties - the share of earnings given by a franchisee as a payment to the franchiser


What are the risks and benefits of partnerships and franchises?

Partnerships are easy to start up, have more assets to contribute, and are subject to few regulations. But, like sole proprietorships, there is unlimited liability for at least one of the partners. Franchises allow each owner a level of control and benefit from the support of the parent company. Disadvantages include high fees, royalties, and purchasing restrictions.


Partnerships

A partnership is a business organization owned by two or more persons who agree on a specific division of responsibilities and profits. The three types of partnerships are: general partnerships, limited partnerships, and limited liability partnerships.

Types of Partnerships

In a general partnership, all parties share equally in both responsibility and liability. In limited partnerships, only one partner is required tobe a general partner. Limited partners only contribute money; they are not liable for the firm’s actions. A limited liability partnership acts like a general partnership, except that all partners have limited personal liability in certain situations, such as another partner’s mistakes.

Characteristics of Partnerships


What are the advantages of partnerships?

Advantages of a partnership include ease of start-up because they are easy and inexpensive to establish. It is a good idea, though, to sign a partnership agreement, which spells out the rights and responsibilities of each partner. There is also little government regulation. And there is more capital available because with more people involved, more capital can be raised. Partnerships can attract and keep talented employees more easily than sole proprietorships. Partnerships are not subject to any special taxes. Partnerships also have shared decision-making, each partner brings different strengths and skills to the business.

What are the disadvantages of partnerships?

Disadvantages include: unlimited liability – at least one partner has unlimited liability (unless the partnership is an LLP) which means that person could lose everything; lack of performance – a partnership may not outlast the life of one of the general partners; and potential for conflict – interpersonal conflicts between partnerships can lead to disagreements, and in some cases, an end to the partnership.

Franchises

Sometimes people opt to form a business franchise instaed of a partnership. A business franchise is a semi-independent business that pays fees to a parent company. In return, the business is granted the exclusive right to sell a certain product or service in a given area.

Advantages of Franchises

Advantages of franchises include: built-in reputation; management training and support; standardized quality; national advertising programs; financial assistance; and centralized buying power.

Disadvantages of Franchises

With their many advantages comes a few disadvantages of franchises: high franchising fees and royalties; strict operating standards; purchasing restrictions; and limited product line.


Section 3: Corporations, Mergers, and Multinationals

Vocabulary:

corporation - a legal entity, or being, owned by individual stockholders, each of whom has limited liability for the firm’s debt

stock – a certificate of ownership in a corporation

closely held corporation – a type of corporation that issues stock to only a few people, who are often family members

publicly held corporation – a type of corporation that sells stock on the open market

bond - a formal contract issued by a corporation or other entity that includes a promise to repay borrowed money with interest at fixed intervals

certificate of incorporation – a license to form a corporation issued by a state government

dividend – the portion of corporate profits paid out to stockholders

limited liability corporation (LLC) – a type of business with limited liability for the owners, with the advantage of not paying corporate income tax

horizontal merger – the combination of two or more firms competing in the same market with the same good or service

vertical merger – two or more firms involved in different stages of producing the same good or service

conglomerate – a business combination merging more than three businesses that produce unrelated products or services

multinational corporation (MNC) – a large corporation that produces and sells its goods and services in more than one country


What are the risks and benefits of corporations?

Corporations provide the opportunity for stockholders to won part of a company and reap the benefits of that company’s success. Corporations provide flexibility for their stockholders. On the other hand, corporations are difficult and expensive to start and must pay double taxes. Also, the original owners can lose control over their company, since decisions are made by corporate officers and a board of directors.


Corporations

The most complex form of business organization is the corporation. Individual stockholders own stock in a corporation and are, therefore, part-owner of the company that issues the stock. In the United States, corporations account for 20 percent of all businesses but more than 80 percent of all sales.

Types of Corporations

Closely held corporations are corporations that issue stock to only a few people, often family members. Publicly held corporations are corporations that sell stock on the open market. Owners of a corporation elect a board of directors that makes all the major decisions.

Characteristics of Corporations


What are the advantages of incorporation?

Incorporation, or forming a corporation, offers advantages to stockholders and the company itself. Advantages to stockholders are limited liability and flexibility with easily transferable stock. Advantages for the company are more potential for growth and longevity; ability to raise money by borrowing; and no need for special managerial skills. Corporations have a self-interest in developing products and services. For example, consumer concern about global warming has led many corporations to develop eco-friendly technology.

What are the disadvantages of incorporation?

Disadvantages include: difficulty and expense of start-up – corporate charters can be difficult, expensive, and time consuming to create; double taxation – corporations must pay corporate income taxes as well as taxes on the dividends paid to stockholders; loss of control – owners do not manage the activities of a corporation; and more regulation.

Corporate Combinations

Corporations can grow larger by merging with another corporation. There are three typs of mergers: horizontal mergers are the combination of two or more firms competing in the same market with the same good or service, such as the merger between Cingular and A T & T in 2004; vertical mergers join two or more firms involved in different stages of producing the same good or service; and conglomerates occur when three or more businesses that produce unrelated products or services merge.

Horizontal and Vertical Mergers


Multinational Corporations

Multinational corporations are the world’s largest corporations and they sell their goods and services in more than one country. Advantages include benefits to consumers by producing jobs and products around the world; help for poorer countries by giving them better living standards; and they spread new technology across the globe.

Disadvantages of MNCs

MNCs unduly influence culture and politics in countries in which they operate. Jobs in poorer countries are often marked by low wages and poor working conditions.

Section 4: Other Organizations

Vocabulary:

cooperative – a business organization owned and operated by a group of individuals for their shared benefit

consumer cooperative – a retail outlet owned and operated by consumers that sells merchandise to members at reduced rates

service cooperative – a type of cooperative that provides a service rather than a good

producer cooperative – an agricultural marketing cooperative that helps members sell their products

nonprofit organization – an institution that functions much like a business, but does not operate for the purpose of making a profit

professional organization – a nonprofit organization that works to improve the image, working conditions, and skill levels of people in particular occupations

business association – a group organized to promote the collective business interests of an area or group of similar business interests

trade association – nonprofit organizations that promote the interests of particular industries


What are some businesses organized to help others?

Cooperatives are businesses created by a group of individuals who share benefits. Nonprofit organizations run like a business but their goal is not to make a profit. Instead these organizations seek to benefit the public in some way.


Cooperatives

A cooperative is a type of business organization owned and operated by a group of individuals for their shared benefit. First instituted by Benjamin Franklin, cooperatives are based on the following principles: voluntary and open membership; control of the organization by its members; and sharing of contributions and benefits by members. Cooperatives do not have to pay income taxes because they are not corporations. Cooperatives are found in many industries including farming and health care.

Consumer Cooperatives

Consumer cooperatives are retail outlets owned and operated by consumers. They sell merchandise to members at reduced prices. Examples of consumer cooperatives include discount price clubs and housing co-ops. Some co-ops require members to work a small number of hours to maintain membership.

Service and Producer Cooperatives

Service cooperatives are co-ops that provide a service. Some service co-ops offer discounted insurance, health care, or legal help. Credit unions are an example of a service co-op. Producer cooperatives are agricultural marketing co-ops that help members sell their products. Members focus their attention on their crops or livestock while the co-op markets the goods for the highest possible price.

Nonprofits

Nonprofit organizations function like a business but do not operate for the purpose of generating profit. Examples of nonprofits include museums, public schools, the American Red Cross, hospitals, churches, and many other groups and charities. Nonprofits, like co-ops, are exempt from paing income taxes, but the nonprofit must meet certain requirements to qualify for tax-exempt status. Nonprofits have limits on their political activity.

Professional Organizations

Some nonprofits provide support to particular occupations or geographical areas. Professional organizations work to improve the image, working conditions, and skill levels of people in particular occupations such as the National Education Association for educators. These organizations keep members up-to-date on industry trends. And they set codes of conduct that members must follow.


Business Associations

Business associations promote the collective business interests of a city, state, or other geographical area. The Better Business Bureau (BBB), which aims to protect consumers by promoting an ethical and fair marketplace is an example of a business association.

Trade Associations

Trade associations promote the interests of particular industries. Many trade associations hire lobbyists to work with state legislatures and Congress to try to influence laws that affect an industry.


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