Chapter 8 Business Organizations

QW: Are YOU someone who??? Seeks out responsibility? Willing to take risks? Believes in one’s self? Desires to reach their full potential? Has a high energy level? Is upbeat and optimistic? Looks toward the future rather than the past? Values achievement over money? Is flexible when they face new challenges? Is strongly committed to your goals?

8.1 Sole proprietorships a business organization is an establishment formed to carry on commercial enterprise Sole proprietorships are the most common These are a business owned and managed by one individual 75% of all businesses in US Create about 6% all business in any given year

Advantages 1. Easy to start up Need business license May need a state license Need a site permit to conduct business (if not operating out of your home) Need to register your name The most difficult part is coming up with a great idea

Advantages 2. Very few regulations Least regulated of all businesses But there are regulations such as wage, health….that need to be followed You might be subjected to zoning laws 3. Sole receiver of profit You get to keep all that you make after paying off debts and taxes Cha-ching!!!!

4. Full control You can respond quickly when needed No fighting with your partners 5. Easy to discontinue Once you want to be done--- you’re out (provided your bills are all paid up) 6. No extra taxes – just income

Disadvantages: 1. Unlimited personal liability Liability --- legally bound to pay off debts If the business fails, the owner may need to see his/her personal property to cover obligations Many business owners run into personal debt 2. Limited access to resources If you need capital (like a tractor) then you have to pay out of pocket Most small businesses won’t get a loan from the bank Expansion might be slow as a result You might not be able to hire lots of people with the necessary skills needed and so you may have to do EVERYTHING You might have to turn down work for awhile (due to lack of workers or physical capital needed)

3. Lack of permanence When a sole proprietor dies--- so may their business These businesses have a hard time recruiting or retaining workers – which can hurt a business Promotions may be lacking Benefits may be none to lack luster

3.2 Partnerships A business organization owned by two or more persons who agree on a specific division of responsibilites and profits 7% of all businesses in US and generate 10% of all income There are three types 1.General – partners agree to share equally in responsibility Many professionals will share resources and start a partnership to pool resources Ex: doctor’s office, law firm

2. Limited partnership – only one partner is required to be a general partner That one partner holds unlimited liability for the firm’s actions The remaining partners contribute money They don’t manage business Limited partners will only lose their initial investment in the company if it fails There has to be one general partner who assumes more of the risks

Advantages 3. Limited Liability Partnerships– newest type All partners are limited Not all types of businesses are allowed to form this way 1.Ease of start up – don’t have to have a contract, but people should Articles of partnership outlines who does what and how partners will share profits and loses Subject to little regulation

Advantages 2. Shared decision making and specialization Each partner have different attributes that are needed to keep a business thriving Someone to bounce ideas off of 3. Larger pool of capital More money (assets) will allow the firm to buy what is needed to expand May be able to retain employees more easily

Disadvantages 4. Taxation – no extra taxes (just income) 1. Unlimited liability for general partners 2. Shared decision making (in some cases) 3. Personal conflict – Partners need to agree before hand on work habits, goals, management styles, ethics Many partnerships dissolve due to personal conflict

8.3 Corporations, Mergers and Multinationals Corporations are the most complex business organization A corp is a legal entity which is owned by stock holders each of which hold limited liablity for the firm’s debts Corporations are an “entity” in itself It is regarded much like an individual It pays taxes and has first amendment rights (amongst other individual acts) 20% of all businesses in the US and created 90% of the products sold and create 70% of our income

Types 1. Closely held – stocks are held by a family or early employees Stocks are hardly traded 2. Public held – stockholders can buy and sell their stock at financial exchanges (the stock market) Most are structured vary corporately Owners elect a board of directors and those directors hire the corporate officers (and oversee them) The board also makes all the major decisions for the corp The corp officers then will hire management…….

Advantages 1. limited liability for owners 2. transferable ownership 3. ability to attract capital – good workers 4. long life – someone dies….it carries on and on Corporations can grow more quickly than any other type of business They can sell stocks to earn more money to reinvest in business They can also sell bonds to borrow money Bonds – a formal contract to repay borrowed money with interest paid at fixed intervals

Disadvantages 1. expense and difficulty of starting up 2. double taxation 3. potential loss of control by founders 4. more legal requirements and regulations Firms that want to incorporate have to file for a state license known as a certificate of incorporation Lengthy process Corps are double taxed Corporations must pay taxes on income and if a stock holder sells stock…they must pay taxes on their dividends If they made money on their stock then they have to pay another tax – capital gains

The founders may find that their board will squeeze them out as corp officers The board might take the company in a different direction and/or fire a bunch of employees to make themselves more profitable The government regulations day to day actions more The Securities and Exchange Commission (SEC) will expect quarterly reports…

Mergers Two companies may decide to join forces and merger their businesses Need govt approval Most are horizontal mergers – two or more competing firms will join forces to sell the same good or service Usually allows for improved efficiency (maybe at a loss for jobs) Govt is afraid of monopolies can so could block

There are vertical mergers too These are when two or more firms involved in different stages of a product’s development join forces so one firm can control the entire process Again they need government approval Conglomerates are seen when one firm will buy another firm that has nothing to do with it’s original firm These are oked usually faster because decreased competition isn’t a factor and so monopolies aren’t the concern

Multinational corps Ones that sell their goods to many nations MNCs Must pay taxes and follow laws of each country they operate in They can have larger operating budgets than many nations Advantages: Jobs and products worldwide Help to spread new technology Help poorer nations to earn better living standards

Disadvantages: Hurt the culture of the countries they operate in Spread low wage jobs (typically) Ruin the environments of their host countries Bust unions Read article about MNCs. Are they good or bad ?

8.4 Other organizations Franchises – is a semi-independent business that pays fees to a parent company The business is then granted exclusive rights to sell a certain product or service in an area Franchisers (the parent company) will develop the products and business model The local owner will earn profits, but will have the support from the parent company

advantages 1. management training and support 2. standardized quality 3. national advertising 4. financial assistance – may help you start up or keep you in the game 5. centralized buying power – they can buy in bulk to drop prices. Franchise owner buys goods from franchisee.

Disadvantages 1. high franchising fees and royalities 2. purchasing restrictions – you can only buy from them 3. limited product line – have to sell what they want you to 4. strict operating rules Dress codes Operating procedures sometimes not your own Where you place what in your stores

Cooperatives A business organization owned and operated by a group of individuals for their shared benefit Most are consumer coops They sell their merchandise to their MEMBERS at a reduced price The coop has the buying power to make larger purchases (reduces price) and this reduction is passed along to the members You might have to pay a membership fee or work at the coop to maintain your membership

Credit unions are cooperatives Credit unions can offer discounted auto insurance, health insurance, legal help…… Producer coops – agricultural based Help members sell their products so they can stay on the farm and produce

Nonprofits and interest groups Businesses that benefit society Ex: museums, public schools, the Red Cross, churches…. The government exempts nonprofits from income taxes and some operate with some government support Interest groups exist to promote their member’s collective interests Most professions have their own membership group who will work to ensure that it’s members are treated fairly within govt. Also groups can keep people up on professional trends