Chapter 8: Business Organizations Section 1

Key Terms 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.

Introduction 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 Focused on the future

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 proprietors need only a business license, a state permit if not working out of their home, and a name for their business

Advantages, cont. There are few regulations - sole proprietorships are the least regulated form of business organization. However, sole proprietorships are subjected to zoning laws, which may prohibit them from operating businesses out of their homes. They are the sole receiver of profit - the owner gets to keep all of the profits after paying income taxes.

Advantages, cont. Sole proprietors have full control - a high level of freedom allows sole proprietors to run their company as they wish.

Disadvantages Checkpoint: What are the disadvantages of sole proprietorships? Unlimited liability - sole proprietorships are fully and personally responsible for all their business debts Limited access to resources Sole proprietorships must buy all the necessary resources they need to run their business, which can be very expensive. They may lack in human capital. Demands on a sole proprietorships can be personally and financially exhausting. Checkpoint Answer: Unlimited liability, limited access to resources, lack of performance

Lack of Performance Sole proprietorships often have trouble finding and keeping good employees. Many sole proprietorships do not have the ability to offer fringe benefits. How does this cartoon show a major disadvantage of a sole proprietorship? Answer: There is no one to run the business when a sole proprietor takes a vacation so they often don’t get vacations or other fringe benefits.

Review Now that you have learned the risks and benefits of a sole proprietorship, go back and answer the Chapter Essential Question. Why do some businesses succeed and other fail?

Chapter 8: Business Organizations Section 2

Key Terms 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 partnership: 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

Key Terms, cont. 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

Introduction 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. There are three types of partnerships General partnerships Limited partnerships Limited liability partnerships

Types of Partnerships General Partnerships Limited Partnerships All parties share equally in both responsibility and liability Limited Partnerships Only one partner is required to be a general partner Limited partners only contribute money; they are not liable for the firm’s actions

Types of Partnerships, cont. Limited Liability Partnerships This partnership acts like a general partnership, except that all partners have limited personal liability in certain situations, such as another partner’s mistakes.

Advantages Checkpoint: What are the advantages of partnerships? Ease of start-up - partnerships 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. Little government regulation More capital - with more people involved, more capital can be raised. Checkpoint Answer: Ease of start-up, little government regulation, more capital, better employees, taxes, shared decision-making

Advantages, cont. Better employees - partnerships can attract and keep talented employees more easily than sole proprietors can Taxes - partnerships are not subjected to any special taxes Shared decision-making - each partner brings different strengths and skills to the business

Disadvantages Disadvantages of partnerships 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

Disadvantages, cont. 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 instead 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 Advantages of franchises include: Built-in reputation Management training and support Standardized quality National advertising programs Financial assistance Centralized buying power

Disadvantages With their many advantages comes a few disadvantages of franchises: High franchising fees and royalties Strict operating standards Purchasing restrictions Limited product line Checkpoint: What are the advantages and disadvantages of franchises? Checkpoint Answer: Advantages include a built-in reputation, management training and support, standardized quality, national advertising programs, financial assistance, and centralized buying power. Disadvantages include high franchising fees and royalties, strict operating standards, purchasing restrictions, and a limited product line.

Chapter 8: Business Organizations Section 3

Key Terms corporation: a legal entity, or being, owned by individual stockholders, each of whom has limited liability for the firm’s debts 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

Key Terms, cont. 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

Key Terms, cont. 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

Introduction What are the risks and benefits of corporations? Corporations provide the opportunity for stockholders to own part of a company and reap the benefits of that company’s success. Corporations provide flexibility for their stockholders.

Introduction What are the risks and benefits of corporations? Corporations provide the opportunity for stockholders to own 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 an 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 about 20 percent of all businesses but more than 80 percent of all sales.

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

Advantages Incorporation, or forming a corporation, offers advantages to stockholders and the company itself. Advantages for stockholders: Unlimited liability Flexibility with easily transferable stock

Advantages, cont. Advantages for the company: More potential for growth and longevity Ability to raise money by borrowing No need for special managerial skills Corporations have a self-interest in developing profitable products and services. For example, consumer concern about global warming has led many corporations to develop eco-friendly technology.

Disadvantages Checkpoint: What are the disadvantages of incorporation? 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 More regulation Checkpoint Answer: Difficulty and expense of start-up, double taxation, loss of control, and more regulation.

Corporate Combinations Corporations can grow larger by merging with another corporation. There are three types 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 AT&T in 2004. Vertical mergers join two or more firms involved in different stages of producing the same good or service. 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 Benefit consumers by producing jobs and products around the world. Help poorer countries enjoy better living standards Spread new technology across the globe

Disadvantages of MNCs Disadvantages 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.

Chapter 8: Business Organizations Section 4

Key Terms 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

Key Terms, cont. 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

Introduction How are some businesses organized to help others? Cooperatives are businesses created by a group of individuals who share benefits. Nonprofit organizations are 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 Sharing of contributions and benefits by members

Cooperatives, cont. 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 There are three kinds of 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 paying 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. Keep members up-to-date on industry trends. Set codes of conduct that members must follow.

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.