1. Business Organizations
Chapter 8

2. Sole Proprietorships
Business organization is an establishment formed to carry on a commercial enterprise
Sole Proprietorships
Are the most common type of business organization
Managed by a single individual
That person earns all profits, is responsible for all of the firms debts

3. Sole Proprietorships Advantages
Easy to start up- small amount of paperwork and legal expense
1. obtain a business license
2. Obtain a site permit for physical business
3. Register business name
Relatively few regulations
Least regulated form of business
Subject to health codes, zoning laws
Sole receiver of profit
Owner keeps all profits after taxes
Full Control
Owner can run business as they wish
Can respond quickly to changes in the marketplace
Easy to discontinue
After all debts and obligations paid there are no other legal obligations to business

4. Sole Proprietorships Disadvantages
Biggest disadvantage is liability (legally bound obligation to pay debts)
Sole proprietors are personally responsible for all business debts (unlimited liability)
Limited access to resources
Difficult to expand business
Hard to acquire funding and loans from banks
Hard to find employees- can’t offer security, advancement or fringe benefits of larger business organizations
Lack of permanence
Has a limited life
Death, retirement, loss of interest by owner business ceases to exist

5. Partnerships
A business owned by two or more persons who agree on a specific division of responsibility
Three different types of partnerships
General Partnership
All partners share equally in responsibility and liability
Limited Partnership
Only one partner has unlimited personal liability for the firms actions
Other partners do not actively run business
Limited partners can only lose initial investment
Limited Liability Partnerships
New type of business organization
All partners protected from liability in certain situations

6. Partnerships Advantages Ease of start-up Uniform Partnership Act
Written partnership agreements called articles of partnership spell out each partners rights and responsibilities
Uniform Partnership Act
uniform state law adopted by most states that establish rules for partnerships
Requires common ownership interest
Profit and loss sharing
Shared management responsibilities
Partnerships are subject to few government regulations
Shared decision making
Each partner bring different strengths and skills to the business
Larger pool of capital
More assets improve the ability to expand business and borrow funds
Easier to attract employees
Taxation
Partners pay taxes only on their profits

7. Partnerships Disadvantages Unlimited liability, except in LLP or LP
In LP general partner has unlimited liability
Lack of absolute control
Potential for conflict between partners

8. Corporations, Mergers and Multinationals
Most complex form of business organization
Corporation is a legal entity
Owned by individual stockholder, each stockholder has limited liability for firm’s debts
Stock is a share of ownership in a corporation
Corporation is considered a legal entity
It pays taxes
Engages in business
Makes contracts
Can sue other parties, and get sued
Two types of corporations
Closely held corporations
stock held by a few people
Stock rarely traded
Publicly held corporations
Many shareholders
Stocks bought and sold on the open market (stock exchanges)
All corporations have the same basic structure
Stockholders elects a board of directors to make major decisions for the corporation
Board hires professional managers to run day to day business

9. Corporations, Mergers and Multinationals
Advantages of Incorporation
Limited liability to owners
Individual investors do not responsible for corps. actions, lose only money they have invested in business
Transferrable ownership
Stockholders can sell stocks to others
Ability to attract capital
Easier to grow company
Can sell stocks to raise capital
Can sell bonds (a formal contract to repay borrowed money at a fixed rate at intervals)
Long life
Company outlasts original owners, can do business indefinitely

10. Corporations, Mergers and Multinationals
Disadvantages of Corporations
Difficult and expensive to set up
Must file for state corporate charter (certificate of incorporation)
Double Taxation
Corporations are legal entities and need to pay taxes on their income
Stockholders also pay taxes on their dividends (portion of corporate profits paid to stockholders)
When stockholders sell their stock pay a tax called capital gains tax if they make a profit
Loss of control
Professional managers don’t always act in the best interest of the company
More regulation
Must hold annual meetings for shareholders
Publically traded companies required to make annual reports to the Securities Exchange Commission

11. Corporations, Mergers and Multinationals
Corporate Combinations
Companies combine with other companies to create larger more efficient firms
Can sell goods at a lower price
Three types of mergers
Horizontal Merger
Two or more companies that compete in the same market and provide the same good or service
Try to improve efficiency, reduce costs and boost revenue
Monitored closely by the federal government so they do not create a monopoly
Vertical Merger
Companies involved in different stages of producing good or service
New firm can control all phases of production
Typically do not lessen competition
Conglomerate
Buy companies that produce unrelated goods
Have more that three businesses that produce unrelated products
One business earns a majority of the firms profits

12. Corporations, Mergers and Multinationals
Multinational Corporations
Produce goods throughout the world
Operate in more than one country at a time
Must obey laws and pay taxes in all countries where they operate
Many have operating budgets bigger than most governments
Advantages
Provide jobs
Spread technology
Help poorer nations improve their standard of living
Disadvantages
Have too much influence over culture and politics in countries where they operate
Working conditions are poor

13. Other Organizations Business franchise
Semi independent business that pays fees to parent company
In return it has the exclusive right to sell a certain product in a given area
Franchiser (parent company) develops products and works with local franchise to produce and sell product
Allows owners a degree of control and owners benefit from support of parent company

14. Other Organizations Advantages Come with a built in reputation
Management and training support
Standardized quality
owners follow certain rules and processes to guarantee product quality
National advertising
Financial assistance
Centralized buying power
buy materials in bulk to keep costs down
Disadvantages
High franchising fees and royalties
Royalties are a share of earnings
Strict operating standards
Must follow all rules in the franchise agreement
Purchasing restrictions
Limited product line
can only sell approved products

15. Other Organizations Cooperatives
Business owned and operated by a group of individuals for their shared belief
Three categories
Consumer Cooperatives (purchasing cooperatives)
Sell merchandise to their members at reduced prices
Make large purchases in bulk to obtain goods at a lower cost
Service Cooperatives
Provide a service at a discounted price
Producer cooperatives
Help members sell their products (usually agricultural products)

16. Other Organizations Nonprofit Organizations Professional Organizations
Business that does not operate for a profit
Usually tries to benefit society
Exempt from income taxes
Some operate with partial government support
Almost all provide services rather than goods
Professional Organizations
Improve image, working conditions, set codes of conduct and skill of people in particular occupations
Labor Unions
Organized group of workers
Attempt to improve working conditions, wages and fringe benefits

17. Labor Unions
Labor unions are groups of workers who band together to gain better pay and working conditions
14% of American workers belong to a union
Two types of unions
Trade unions- all workers perform the same skill (craft union)
Industrial unions- all workers in the same industry

18. Labor Unions
Organized labor operates at three levels- local, national and the federation
Local- members of a factory, company or geographic area
Deals with a company negotiating a contract and monitors the terms of a contract
National unions help set up local unions and to negotiate contracts between local unions and companies
Provides lawyers and staff to negotiate contracts for the entire industry
Federation level- AFL-CIO is a union that represents 13 million workers worldwide

19. Labor Unions
Some criticize unions for trying to control the labor supply
Some unions support the closed shop where a worker had to be a union member to be hired
1947 Taft-Hartley Act closed shops became illegal in any company that participated in interstate commerce
More common now is the union shop
Companies hire nonunion workers but they must join the union to begin working
Taft Hartley allows states to ban this activity
These states are called right to work states that prevent unions from forcing workers to join unions
Modified union shops workers can join union if they want to, but are not required to join
Union can’t be brought into a workplace unless a majority of workers vote for it
National Labor Relations Board oversees union activity

21. Labor Unions Union carries out collective bargaining
Officials from union and company meet to discuss terms of worker contacts (hours worked, wages, benefits)
When two parties can’t agree they try mediation
Third party comes in to help both sides reach an agreement
Some cases workers choose arbitration
Where third party decides how to settle the disagreement
Both parties agree in advance to accept what arbitrator decides
Unions and management use different tools to try to get other side to accept agreement
Workers can strike where all union workers refuse to work
Unions can encourage the public to boycott the business’ products
Companies can lockout workers until they meet their terms