Business Organizations Chapter 8 Business Organizations

Sole Proprietorship

Terms Business Organization- an establishment formed to carry on commercial enterprise (p. 185) Sole Proprietorship- a business owned and managed by a single individual (p. 1 85) Business License- authorization to start a business issued by the local government (p. 186 ) Fringe Benefit- payment other than wages or salaries (p. 188) Liability- the legally bound obligation to pay debts (p. 187) Zoning law- law in a city or town that designates separate areas for residency and for business (p.187)

Sole Proprietorship- a business owned and managed by a single individual (p. 1 85) -individual earns all profits, responsible for all debts -About 75% of all businesses -generates only about 6% of all sales -usually low start up costs -some licensing may be required Advantages- simple to establish (few barriers to entry) - Relatively few regulations (ex. Zoning laws) -sole receiver of profit -full control -easy to discontinue

-Unlimited personal liability -Limited access to Resources Sole Proprietorship- Disadvantages -Unlimited personal liability -Limited access to Resources -Lack of permanence (may not be able to afford “fringe benefits”) What sort of impact do you think the Health Care Act will have on sole proprietorships?

Partnerships

Advantages to Partnerships: Ease of start-up: - Partnerships are easy to establish generally inexpensive. - Law does not require a partnership agreement. - The Articles of Partnership spell out each partners rights & responsibilities. - The Uniformed Partnership Act (UPA) uniform state law adopted by most states to establish rules for partnership. - UPA requires: 1. common ownership interests, 2. profits & loss sharing, 3. shared management & responsibilities.

Advantages of Partnership Shared Decision Making & Specialization: - Sole proprietorship 100% decision making burden. -partnership shares decisions & responsibilities. - a partner may bring much needed skills to the business.

Advantages of Partnership Larger Pool of Capital: - Each partners assets & resources can be combined -$$$ can become more easily accessible. - can help retain talented employees because partnership has more resources for fringe benefits.

Advantages of Partnership Taxation: - Each individual partner assumes tax liability based on their share of income. - The actual entity that is the business itself is not obligated to pay taxes. IRS

Types of Partnerships 1: General 2: Limited 3: Limited Liability General Partnerships: - These are the most commonplace type of partnership. - It is an equal 50/50 setup in regards to both responsibility and liability. - Doctors, lawyers, accountants, and other professionals form general partnerships.

Types of Partnership Limited Partnership: - Only one of the partners is required to take on the role of general partner. ( unlimited personnel liability for firms actions). The remaining partner or partners contribute funds.

Limited Liability Partnerships - Every partner takes on the role of limited partners. - It is a situation of circumstance, a LLP functions as a general partnership except all partners are limited from personnel liability in certain situations.

Disadvantages of a Partnership Conflict potential: - Working mutually with another person is not easy and human nature could prove to inspire some sort of conflict, corrupting a healthy productivity of a firm.

Review Three types of partnerships: Advantages: partnership LLP General, limited partnerships. Advantages: Inexpensive- pay tax on your income from partnership Limited Partners- limited liability. Disadvantages: Potential for conflict, a general partner have unlimited liability.

Corporations Corporations are complex business organizations that can be combined to form even larger businesses. Corporations are separate legal entities

Introduction to Corporations Stockholders own shares stock makes you a part owner of that corporation. Corporation: a legal entity owned by individual stockholders Stock: a share representing a portion of ownership in a corporation

Corporations cont. Corporate Structure: Types of Corporations: closely held corporation. also known as privately held corporations. publicly held corporation. Stocks are bought & sold at OTC on stock exchanges, such as the New York Stock Exchange. Corporate Structure: corporations have same basic structure. Owners (stockholders) Board of Directors (make major decisions) Corporate Officers (run corporation) Employees (workers) Closely held corporation: corporation that issues stock to only a few people, often family members Publicly held corporation: corporation that sells stock on the open market

Advantages of Incorporation Advantages are: Limited liability for owners Transferable ownership Ability to attract capital Long life

Advantages of Incorporation (cont.) Advantages for Stockholders: Limited Liability. only lose the amount of money invested More Flexibility than other ownership forms. Transferable, Advantages for the Corporation: Potential for growth. Raise Money by selling shares & borrowing it. by selling bonds. Long Life- Do not end with the death of an owner, because stock is transferable. Bond: a certificate issued by a corporation, which promises to repay with interest the amount it borrowed from the buyer

Disadvantages of Incorporation Expense and difficulty of start-up Double taxation Potential loss of control by the founders More legal requirements and regulations

Disadvantages of Incorporation cont. Difficulty and Expense of Start-up: Must file for state license known as Certificate of Incorporation. The application lists crucial information such as: The corporate name Statement of purpose Length of time that the business will run (usually “for perpetuity”, or without limit) Founders names and addresses Method of fund-raising The rules for the corporations management Certificate of incorporation: license to form a corporation issued by state government

Disadvantages of Incorporation cont. still Double Taxation: Corporations are legal taxable entities separate from their owners Stockholders must pay personal income tax on dividends. Stockholders face additional tax if they sell their shares called a capital gains tax. Loss of Control:Managers and boards of directors (not owners) manage corporations. More Regulation: Corporations must hold annual meetings for shareholders & keep records of all business transactions. Publicly held corporations are required to file quarterly and annual reports to the Securities and Exchange Commission (SEC – a federal agency that regulates the stock market). Dividends: the portion of corporate profits paid out to stockholders

Business Franchises A business franchise is 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. There are numerous advantages and disadvantages to the business franchise system.

Nonprofit Organizations · A nonprofit organization is an institution which functions like a business, but does not operate in order to generate profits. · Nonprofit organizations are tax exempt. · Types of nonprofit organizations include professional organization, business associations, trade associations, and labor unions

A Closely Held Corp. is a corporation that is owned by family who do not sell shares on the open market but sell the shares to family members A Publicly Held Corporation is a Corp. that sells shares in the open market to the public.

Types of Mergers Horizontal merge is the when one company joins another that are competing in the same market Vertical merge is the joining of firm involved in the different stages of production. Conglomerates is when firms that sell unrelated products join.