Chapter 8: Types of Business Organizations Section 3: Corporations, Mergers, and Multinationals pg.238-247

Corporations Corporations are the third main kind of business organization. It is a business owned by individuals, called shareholders or stockholders. These people own the rights to the company’s profits, but they face limited liability for the company’s debts and losses. These individuals acquire ownership rights through the purchase of stock, or shares of ownership in the corporation.

An Example: Suppose a company sells a million shares in the form of stock. If you brought 10,000 shares, you would own 1% of the company. If the company runs into trouble, you would not be responsible for any of its debt. Your only risk is that the value of your stock might decline. If the company does well and earns a profit, you might receive a payment called a dividend, part of the profit that the company pays out to stockholders.

Public v. Private Companies A corporation that issues stock that can be freely bought and sold is called a public company. One that retains control over who can buy or sell the stock is called a private company. Corporations make up about 20% of the number of businesses in the U.S., but they produce most of the country’s goods and services and employ the majority of American workers.

More Info on corporations Unlike a partnership or sole proprietorship, this a formal, legal entity separate from the individuals who own and run it. If the business fails, only the assets—the office building, equipment, and company bank accounts—are at risk. Setting up a corporation involves an expense of drawing up and filing papers requesting permission from the state government to incorporate. The stockholders elect a board of directors. In most corporations the stockholders and board are not involved in the day-to-day running of the business.

Corporations: Advantages--1 Corporations are more effective than either of the other business structures at raising large amounts of money. The key methods of raising money are sale of stock and the issuing of bonds. A bond is a contract the corporation issues that promises to repay borrowed money, plus interest, on a fixed schedule. Corporations provide their owners with limited liability, which means that the business owner’s liability for business debts and losses is limited. Also, corporations have unlimited life—they continue to exit even after a change in ownership.

Corporations: Advantages--2 Access to Resources: stocks and bonds Professional Managers: corporations can hire managers with strong backgrounds in finance and sales. This should lead to higher profits. Limited Liability: anyone including the board are protected from liability. Unlimited Life: the company can continue as long as it is a viable business.

Corporations: Disadvantages-1 Most of the disadvantages are related to their size and organizational complexity. Corporations are costly and time-coming to start up; they are governed by many more rules and regulations; and b/c of the organizational structure, owners may have little control over business decisions.

Corporations: Disadvantages-2 Start-Up Cost & Effort: the paperwork has to be filed with the state government is extensive, and most have to hire a law firm to help with the task. Heavy Regulation: Corporations must prepare annual reports for the Securities & Exchange Commission (SEC), the government agency that oversees the sale of stock. It also must prepare quarterly financial reports for the stockholders. They also must hold yearly meetings for its stockholders.

Corporations: Disadvantages-3 3. Double Taxation: Profits that the corporation makes are taxed and when stockholders receive their dividend income, paid out of the company profits, it is also taxed. 4. Loss of Control: The founders or original owners can lose power if the board of directors vote against them. Example: if the board votes in a new sales manager that the founders do not like.

Business Consolidation-1 Companies merge and consolidate to increase efficiency, gain a new identity, keep rivals out of the marketplace, and diversify the product line. There are two main kind of mergers(pg.243). A horizontal merger describes the joining of companies that offer the same or similar products or services. A vertical merger describes the combining of companies involved in different steps of production or marketing of a product or service.

Business Consolidation-2 An alternative to the two main types is conglomerate, which results from a merger of companies that produce unrelated goods and services. Through growth, consolidations, and other means, an enterprise can grow so big that it becomes a multinational corporation, a large corporation with branches in several countries.

Bill Gates: Entrepreneur & Corporate Leader Microsoft employs more than 95,000 people in more than 100 countries. In 1975, he and his partner wrote BASIC, the programming for early PCs. In 1981, Microsoft incorporated, and made a deal with IBM, to provide the operating system for all their PCs. In 1985, it released Windows, which would become the most popular operating system in the world. In 1994, Gates started the Bill and Melinda Gates Foundation, that focuses on global health and education. By 2008, he had given the responsibilities of running Microsoft to others and now works full time with his foundation.