Part One Business Organizations Unit 5 Part One Business Organizations

Types of businesses organizations There are three main types of businesses, each with different types of ownership Sole Proprietorship, Partnership and Corporations

Sole Proprietorships – Section 1 A business owned and run by one person Over 70% of all businesses Includes small businesses (“mom & pops”), family farms, freelancers and contractors

Advantages of S.P. Easiest to start – fewer forms, regulations Can report tax income on their own tax return – no separate taxes for the business Owner Receives all of the profits Full Control – no shareholders or partners to answer to Easy to Discontinue

Disadvantages of S.P. Unlimited Liability – owner is responsible for all debts Difficult to raise financial capital, leading to frequent closings for these businesses 49% close within 4 years, and 60% close after 6 years. Often can’t pay competitive wages, offer fringe benefits (health insurance, 401k) Lack of Professionalism Owners are not often experienced in business management Suffer in comparison to larger businesses

Partnership – Section 2 A business organization owned by two or more persons About 8% of all businesses

Advantages of Partnerships Easy and Inexpensive to start Does require some legal documents Shared work and effort Shared financial commitment each partner’s assets improve ability to borrow funds and expand Taxation Not subject to special taxes Partners pay individual income tax on their own earnings from the business

Disadvantages of Partnerships 1) Unlimited Liability one partner can be responsible for all liabilities 2) Potential for Disagreement Partnerships can be most difficult to dissolve or sell

Corporations – A business owned by individual stockholders Stockholders elect a board of directors – one share of preferred stock, one vote The Board of Directors then selects a CEO (or President)

Advantages for Corporation Limited liability for owners – can only lose your stock value Easiest to transfe ownership Ability to attract capital and raise money Long life

Disadvantages of Corporations Expensive and difficult to start up Double taxation of profits Owners and managers/employees are separate More legal requirements and regulations

Other Forms of Business Organizations: S Corporation – also known as LLC – Limited Liability Corporation, a corporation with a limited number of owners, does not pay income tax Non-profit organization – organized as a corporation, but does not have to pay taxes on its earnings if it meets certain requirements Franchise – a small business that uses the name and products of a corporation in exchange for fees and royalties Consumer Cooperative & Producer Cooperative – organizations owned by members.

Reasons to incorporate a business: For the corporation: Raise money without borrowing But – the owners give up some control For the investor: Ownership without liability But – less control over business operations

Mergers Horizontal Merger: two or more competing firms merge, Example: Wells Fargo buying Wachovia Reasons: increase market share, reduce costs of competition, economies of scale

Mergers (cont) Vertical Merger: A merger of two or more companies involved in different stages of production of the same good or service. Example: a furniture company buys a sawmill Reasons: reduce costs from suppliers

Mergers (cont) Conglomerate – a firm buying a company that produces a completely unrelated product Example: Berkshire-Hathaway Reasons: diversity – poor conditions in one market will not hurt entire company

Problems with Mergers Conflict within the “corporate culture” Lack of experience in other businesses Size: Lack of oversight Diseconomies of Scale

Mergers and Competition Mergers can also decrease competition 1890: passage of Sherman Anti-Trust Act which outlawed “combinations in restraint of trade” Government regulatory power continued to increase, and reached its height during FDR’s New Deal – Robinson-Patman Act (1936) Regulate business practices Break up monopolies Block mergers

Multinational Corporations Corporation that operates in more than one country at a time Bring jobs and growth to less developed countries But also – low wages and loss of jobs in other countries (outsourcing)