1. BUSINESS ORGANIZATION Chapter 8, Lesson 1

2. FORMS OF BUSINESS ORGANIZATIONS  There are three main forms of business organization in the economy today—  sole proprietorship  Partnership  corporation.  A hybrid form of business called the franchise is also popular and combines investment opportunities with ownership.  Each offers its owners significant advantages and disadvantages.

3. SOLE PROPRIETORSHIP  The most common form of business organization  Sole proprietorship or proprietorship—a business owned and run by a single individual.  Is the easiest form of business to start because it involves almost no requirements except for occasional business licenses and fees.  Most proprietorships are ready for business as soon as they set up operations.  You could start a proprietorship simply by putting up a lemonade stand in your front yard.  Can be set up almost anywhere- Internet, garage, business building, etc.

4. ADVANTAGES 1.Easy to set up. 2.Management also is relatively simple. 1.Decisions do not require the approval of a co-owner, boss, or other "higher-up." This flexibility means that the proprietor can make an immediate decision if a problem or opportunity comes up. 3.The owner can keep the profits of successful management without having to share them with other owners. 4.Does not have to pay separate business income taxes because the business is not recognized as a separate legal entity. 1.The owner still must pay individual income taxes on profits earned by the sole proprietorship, but the business itself is not taxed separately. 5.The psychological satisfaction many people get from being their own bosses. 6.Easy to get out of business. All the proprietor has to do is pay any outstanding bills and then stop offering goods or services for sale.

5. DISADVANTAGES 1.The main disadvantage of a proprietorship is that the owner of the business has unlimited liability. 1.Owner is personally and fully responsible for all losses and debts of the business. If the business fails, the owner’s personal possessions may be taken away to satisfy business debts. 2.Can be difficult raising financial capital. 3.The small size of a proprietorship can also be a disadvantages. 4.Limited managerial experience. 5.Difficulty of attracting qualified employees. 6.Limited life. This means that the firm legally ceases to exist when the owner dies, quits, or sells the business.

6. PARTNERSHIPS  Owned by 2 or more people.  Share many of the same strengths and weaknesses of sole proprietorships.  2 most common types are:  general partnership- all partners are responsible for the management and financial obligations of the business.  limited partnership- at least one partner is not active in the daily running of the business and has limited responsibility for the debts and obligations of the business.  Can be started with just a handshake, but usually formal legal papers are drawn up to specify arrangements between partners.  Although not always required, these papers state ahead of time how the expected profits (or possible losses) will be divided.

7. ADVANTAGES 1.Easy to start up. 2.Ease of management is another advantage. Each partner usually brings a different area of expertise to the business; one might have a talent for marketing, another for production, another for bookkeeping and finance, and so on. 3.Lack of separate taxes on a partnership's income. 4.Partners earn profits from the firm and then pay individual income taxes on them. 5.Partnerships can usually attract financial capital more easily than proprietorships. This is because they are generally larger and have a better chance of getting a bank loan. 6.They tend to have more efficient operations that come with their slightly larger size.

8. DISADVANTAGES  This is where the two types of partnerships differ.  The general partnership has the disadvantage that each partner is fully responsible for the acts of all other partners.  If one partner causes the firm to suffer a huge loss, each partner is fully and personally responsible for the loss.  In the case of the limited partnership, a limited partner’s responsibility for the debts of the business is limited by the size of his or her investment in the firm.  A second disadvantage is that the partnership, like the proprietorship, has limited life.  When a partner dies or leaves, the partnership must be dissolved and reorganized as a new partnership if the remaining partners want to stay in business.

9. CORPORATIONS  A corporation is a form of business organization recognized by law as a separate legal entity with all the rights of an individual.  A corporation can do almost anything you can do except vote.  a corporation is a very formal and legal arrangement.  People who want to incorporate, or form a corporation, must file for permission from the national government or the state where the business will have its headquarters.  If approved, a charter is granted. The charter states the company’s name, address, purpose, and other features of the business.  The charter also specifies the number of shares of stock, or ownership certificates, in the firm. These shares are sold to investors, called stockholders or shareholders.  The money gained from the sale of stock is used to set up the corporation.  If the corporation is profitable, it may eventually issue a dividend—a check that transfers a portion of the corporate earnings—to each stockholder.

10. CORPORATE STRUCTURE  When investors purchase stock, they become owners with certain ownership rights. The extent of these rights depends on the type of stock purchased: common or preferred.  Common stock represents basic ownership of a corporation.  Each share of common stock usually has one vote to elect a board of directors. The directors, in turn, set broad policies and goals for the corporation, and also hire a professional management team to run the business.  Preferred stock represents nonvoting ownership shares of the corporation.  Preferred stockholders cannot vote for the directors, but they receive their dividends before common stockholders receive theirs.  If a corporation goes out of business, preferred stockholders get their investment back before common stockholders do.

11. ADVANTAGES  Easy to raise capital.- if they need more they sell more stock.  A corporation may also borrow money by issuing bonds. A bond is a written promise to repay the amount borrowed at a later date.  The amount borrowed is known as the principal. While the money is borrowed, the corporation pays interest, the price paid for the use of another’s money.  Another advantage is limited liability for its owners. This means that the corporation itself, not its owners, is fully responsible for its obligations.  A third advantage of a corporation is that the corporation's board of directors can hire professional managers to run the firm.  This means that the corporation's owners, its stockholders, can own a portion of the corporation without having to know much about the business itself.

12. ADVANTAGES  Another advantage is unlimited life.  This leads to a fifth advantage, the ease of transferring ownership of the corporation.  If a shareholder no longer wants to be an owner, he or she simply sells the stock to someone else who then becomes the new owner.  As a result, it is easier for the owner of a corporation to find a new buyer than it is for the owner of a sole proprietorship or a partnership.

13. DISADVANTAGES  Corporations are viewed as a separate legal entity.  Double taxation- Profits are taxed the first time when the corporation pays income taxes and taxed a second time when shareholders pay taxes on their dividends.  It’s difficult and very expensive to get a charter.  Depending on the state, attorney’s fees and filing expenses can cost several thousand dollars.  Owners, or shareholders, have little voice in how the business is run.  Shareholders vote for the board of directors, and the directors turn day-to-day operations over to a professional management team. The result is a separation of ownership and management.  Subject to more government regulation than other forms of business.  Corporations must register with the state in which they are chartered.  If a corporation wants to sell its stock to the public, it must register with the federal Securities and Exchange Commission (SEC).  It will also have to provide financial information concerning sales and profits to the general public on a regular basis.

14. FRANCHISES  Technically, a franchise is a temporary business investment that involves renting or leasing another firm’s successful business model.  The franchisor is the actual owner of the business that lets other investors rent or lease its name, business profile, and way of doing business.  The franchisee is the investor who rents or leases the business model from the franchisor and then hopes to recoup his or her investment by selling the franchisor’s goods or services.  McDonalds, 7-11, Subway, Pizza Hut, Duncan Donuts, Jiffy Lube, are examples of franchises. McDonaldsPizza HutDuncan Donuts

15. ADVANTAGES  The Franchisee will get brand recognition and access to a nationwide support network.  The Franchisor also gains more exposure and business with another franchise opening.  With a franchise and brand recognition, the franchisee should be able to recover their opening costs within the first year.

16. DISADVANTAGE  Investing in and opening a franchise can be extremely costly.  For example, the start-up costs alone for a McDonald’s could be as high as $2 million or even $15 million for a Hampton Inn & Suites.  There are additional costs if the franchisee decides to terminate the franchise agreement early.

17. NONPROFIT ORGANIZATIONS  A nonprofit organization works in a businesslike way to promote the collective interests of its members rather than to seek financial gain for its owners.  There are hundreds of thousands of nonprofit organizations in the United States today. The American Red Cross, the United Way, the Smithsonian Institution, the Girl Scouts, and even the U.S. Olympic Committee are just a few of the better-known national nonprofits