Business Organizations

Forms of Business Organizations

 The most common form of business in the United States is a sole proprietorship  Defined as a business run or owned by 1 person  They are also the smallest in size (number of employees and revenue)  They earn about 1/6 of the net income earned by all businesses

ADVANTAGESDISADVANTAGES  Ease of startup  Ease of management  Owner enjoys the profits of successful management  The owner does not have to pay separate business income taxes  Psychological satisfaction  Ease of getting out of business  The owner has unlimited liability  Difficulty in raising financial capital  Size and efficiency  The proprietor often has limited managerial experience  Difficulty in attracting quality employees  The sole proprietorship is limited life

 Partnership is another type of business  It is a business that is jointly owned by 2 or more people  There are 2 types of partnerships  General - all partners are responsible for the management and financial obligations of the business  Limited - at least 1 partner is not active in the daily running of the business, although he or she may have contributed funds to finance the operation

ADVANTAGESDISADVANTAGES  Ease of establishment  Ease of management  Lack of special taxes  They usually attract financial capital more easily than proprietorships  Slightly larger in size, making for more efficient operation  They find it easier to attract top talent into their organizations  Each partner is fully responsible for the actions of the other partners  Limited life  Potential conflict between partners

 It is a form of business organization recognized by law as a separate legal entity, having all the rights as an individual  They account for 1/5 of the firms in the United States but 90% of all the sales  It is a very formal procedure to form and it must receive permission from the United States in order to be formed  The government gives it a charter (a document that gives permission to form a corporation)  The charter specifies the amount of stock a corporation may have  Stockholders, or share holders, then buy stock in the corporation and becomes an owner with certain owner rights

 There are 2 basic kinds of stock purchased in a corporation  Common Stock- represents basic ownership and the owner generally receives 1 vote for each share of stock they own in order to elect a board of directors; can receive dividends  Preferred Stock- represents non-voting ownership shares of the corporation; has priority over common stockholders for dividends

ADVANTAGESDISADVANTAGES  The ease of raising financial capital  The directors can hire professional managers to run the firm  The corporation provides limited liability for its owners  Unlimited life  The ease of transferring ownership  The difficulty and expense of getting a charter  The owners and shareholders have little say in how the business is run after they have voted in a board of directors  Double taxation  They are subject to more government regulation

 Government can regulate corporations in order to protect the consumers’ interests  States have limited regulations lately in order to encourage competition  States actively recruit corporations to come to their state  They can offer tax credits, or a reduction in taxes, in return for the creation of new jobs or new business investment

Business Growth and Expansion

 A business must estimate its cash flow first by finding its net income (subtracting all of its expenses, including taxes, from its revenues)  These expenses include any and all costs, as well as depreciation (how much value an item loses through general wear and tear)  Cash flow = sum of net income and depreciation (non-cash charges)  Companies must then reinvest its cash flow in order to be able to produce more products

 When firms merge (join together), 1 of the firms gives up its corporate identity  Mergers happen for multiple reasons. For example:  Managers feel they cannot grow as fast they would using the funds they are currently generating internally  Efficiency  The need to acquire new product lines  To catch up with, or even eliminate, their rivals  To lose its corporate identity

 There are generally 2 types of mergers:  Horizontal merger- when 2 or more firms that produce the same kind of product join forces  Vertical merger- When firms involved in different steps of marketing or manufacturing merge  A conglomerate is when a corporation becomes so large through mergers and acquisitions  Diversification is the main reason for conglomerates  Other large corporations are also known as multinationals basically meaning they manufacture or service operations in a number of different countries  Multinationals are important because they can sell goods and produce goods in many different places

Other Organizations

 Community and Civic Organizations are non- profit organizations (schools, churches, hospitals, welfare groups, and adoption services)  They provide goods and services to the public while pursuing other rewards which are not cash driven  They do not issue stock, pay dividends, or pay income taxes

 Cooperatives (or Co-ops) are non-profit organizations that carry out economic activity that will benefit its members  Some types of Cooperatives are as follows:  Consumer Cooperatives- Voluntary associations that buy bulk amounts of goods such as food and clothing on behalf of its members  Service Cooperatives- Provides services such as insurance, credit, and baby-sitting to its members  Producer Cooperatives- Helps members promote or sell their products.

 Labor Unions are organizations workers form to represent its members’ interests in various employment matters  They generally participate in collective bargaining by negotiating with management over various issues for its members  Professional associations are a group of people in a specialized occupation that work to improve working conditions  Business associations are groups used to promote the interest of businesses, for example, the Chamber of Commerce or Better Business Bureau

 Government is a non-profit economic organization  TVA Power Company, is an example of a Government company that provides a direct service to the people, competing with private power companies  FDIC (Federal Deposit Insurance Company) is another example by insuring deposits in banks  U.S. Post Office is another example

 Government also acts indirectly by way of making sure the market economy operates smoothly  Public utilities are regulated by the government in order to deliver important products to the public at affordable prices for consumers  It also plays an indirect role when it grants money to people in the form of Social Security, veterans benefits, financial aid to college, and unemployment  This power is used to influence the production of goods and services