1. Part One Business Organizations
Unit 5
Part One
Business Organizations

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

3. 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

4. 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

5. 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

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

7. 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

8. 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

9. 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)

10. 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

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

12. 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.

13. 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

14. 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

15. 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

16. 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

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

18. 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

19. 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)