1. Chapter 5 Business Organization

2. 5-1 Business in the U.S. Economy  Goals:  Describe the changing status of U.S. employment.  Discuss the role of business in the U.S. economy.  Describe three major types of businesses.

3. The Changing U.S. Job Market  Employment Data:  In 2007 144 million people held jobs.  Projection for 2014 was to be 164 million people  In May 2015, 148 million people held jobs. http://data.bls.gov/timeseries/LNS12000000 http://data.bls.gov/timeseries/LNS12000000  Pressures on Employees  Technology would allow people to work fewer hours. However, downsizing has actually occurred more due to technology.  Companies have streamlined production and implemented other cost-cutting procedures. Businesses have required employees to take on new tasks and work extra hours. Wages have been decreased or increased costs outweigh the rise in income.  Survey (prior to 2008) reported that 7 of 10 parents felt they were not able to spend enough time with their children. Children have seen their parents take on second jobs, different jobs, enroll in classes in order to make things work. These experiences will shape your life and your future decisions.  Economic pressure has resulted in the increased used of contingent workers. Contingent workers don’t have a long-term contract.  Pros: Flexibility it offers. Cons: Can’t find permanent employment (by choice or not).

4. Business and the Economy  Size of Businesses  Most U.S. businesses are quite small. Nearly 20 million businesses have no other employees other than the owner. About 5 million companies employ less than 20 employees.  Majority of the U.S. companies consists of small businesses (less than 20 employees).  Roles of Business  They provide employment for millions of people.  Wages are used to purchase goods and services.  Profits earned by businesses are used to compensate owners and investors.  Businesses pay taxes to Federal, State and Local Governments.  Governments spend these taxes to proved services (i.e. clean water, maintained streets, police, hospitals, schools).  Most important role is to make and distribute products and services needed by consumers, governments and other businesses.  Impact on a Community  When a new business opens, it pays wages to its workers and buys goods and services form other businesses in the area (sometimes). Essentially, it’s new money in the community. It becomes cyclical.  Employees spend the money in the community which might result in the need for more employees to meet the needs of the consumer.  When a large business opens in an area, other businesses may follow. Or maybe not. Sometimes the new business drives the competitors out.  If a new business relocates to an area employees might need housing, transportation, entertainment.  Taxes paid by both business and individuals should revitalize the area.

5.  Business Activities  Generate Ideas – Business begins with an idea. Business must continue to improve and develop new ideas in order to remain successful. They must remain competitive and continue to develop.  Raising Capital – Businesses need financial resources to operate. Need capital to buy buildings, hire and train workers and complete day-to-day operations. Some capital comes from owners. Most is obtained through loans from financial institutions or investors. Businesses needs more capital as it develops and grows.  Employing and Training Personnel – Businesses need human resources. Even business that begin with no employees other than the owner will add part-time and full-time employees as they grow. New employees receive training in order to perform their jobs correctly as well as continuing training as new procedures or tasks are added or even technology is introduced.  Buying Goods and Services – All business buy goods and services. Businesses use many of the purchases for their own operation. (i.e. Automobile manufacturers need steel, aluminum, plastic, tires, batteries, air bags, air conditioners… Retailers buy an assortment of product to sell to customers like display equipment and computers. Some businesses employ the services of other companies like lawn care, advertising, legal and accounting).  Marketing Goods and Services – Marketing refers to the activities directed at providing the goods and services wanted by business’s customers. They must satisfy customers who usually can choose to buy from competitors offering similar products and services.  Maintaining Business Records – All businesses need some type of record-keeping system. They need to track performance and make decisions. Customers need information about orders an payments. Government requires businesses to keep records. Technology helps

6. Types of Businesses  Three major categories of business  Producers – Create the products and services used by individuals and other businesses.  Extractor – Take resources from nature for direct consumption or use in developing other products.  Farmers – Cultivate land and use other natural resources to grow crops and raise livestock for consumption.  Manufacturers – Get supplies from other producers and convert them into products. Sell their products to consumers and other businesses.  Intermediaries – Involved in selling the goods and services of producers to consumers and other businesses. Most common type are retailers and wholesalers.  Service Businesses - Carry out activities that are consumed by its customers. They include dentists, lawyers, health care, pet sitters, painters, furniture movers. Newer types of service businesses are internet service providers, web designers and online travel agents.  It is the fastest growing part of the economy.

7. 5-2 Forms of Business Ownership  Goals:  Understand the three major forms of business ownership.  Determine when each form of business ownership is most appropriate.  Recognize other specialized business ownership forms.

8. Business Ownership  Proprietorship  Owned and run by just one person. Easiest form of business to start and end. Very few legal requirements.  Sole control of the business. You receive all the profits, but you also have all the debts. If the business fails, and you owe money to creditors they can take your personal assets (depending on the form of business you create).  Partnership  Owned and controlled by two or ore people who have entered into an agreement. Easy to start.  Owners are responsible for key business decisions. The partners share investments and profits based on the terms of their partnership agreement (get it in writing). Also depending on the agreement, the partners are liable for the debts of the business.  Corporation  A separate legal entity formed by documents filed with a state. Owned by one or more shareholders and managed by a board of directors. Most corporations have several owners who invest in the business by purchasing shares of stock. More difficult to form than a proprietorship or partnership.  Not all owners have direct involvement in decision-making about business functions. They don’t have access to profits unless the board of directors approves it. Corporations protect the liability of stockholders to only the amount of money they invested.

9. Choosing a Form of Business Ownership  Choosing a Proprietorship  Most businesses begin as a proprietorship.  They prefer to work for themselves and have total control of the business.  It’s easier than other businesses. Begins by buying a selling as a business. You don’t need a business name. Will need to obtain required government licenses and permits. Need to account for income, expenses and pay taxes on profits of the business. Eventually, when you obtain a name, you will need to register the name with local, state and federal governments.  Provide tax advantages for the owner. Income is taxes as part of your personal income. Business expenses can be used to reduce the income.  In the eyes of the law, the owner is the same as the business. Debts of the business are the responsibility of the owner. Personal assets not connected to the business will need to be used to pay business debts if the business assets are not adequate to cover those debts.

10.  Choosing a Partnership  More complex and formal than a proprietorship.  Can be formed by the verbal agreement of two or more people.  Better to have a partnership agreement. Partnership Agreement is a written agreement among all owners. Details the rules and procedures that guide ownership and operations.  Identifies the business name, the investments, and other contributions of each partner. Shows profits and losses and how they will be divided among the partners. Defines the authority and responsibilities granted to each person and how the partnership can be dissolved. Most states require that partnerships register a business name as well as the name of each person in the partnership.  Advantages and Disadvantages: Two or more people can contribute to the investment needed to start the business as wee as the expertise required to run a business. Each partner is responsible for decisions made by all other partners. No protection for the personal assets of any partner. Similar to Proprietorship.  Good ownership form for people who share an idea for a business. They want to cooperate in managing and investing in the business.

11.  Choosing a Corporation  Becoming increasingly popular for new an small businesses.  Subject to many more laws and more difficult to form than proprietorship or partnership.  Corporations are treated as an “individual” by governments. They must follow the laws of the state in which they are organized.  To form a corporation, they must file articles of incorporation. They are written legal documents that defines ownership and operating procedures and conditions for the business.  States usually provide a form that can be filled out. Business must create corporate bylaws that are the operating procedures for the corporation. Must name a board of directors, the people who will make the major policy and financial decisions for the business. Corporation also issues shares of stock to investors.  Advantages to Owners: Liability of any owner is limited to the amount of money invested. Amount of debt of the business dose not matter. People can invest in the business and receive some of the profit without having to take part in the day-to-day management and operations. Business can be easily expanded and ownership can be changed by the sale of stock.  Disadvantages: Decision making is shared among managers, the board of directors, and shareholders. Records are required and more laws regulate operations than for other forms of ownership. Pay corporate taxes on profits earned. Investors also pay taxes on their individual earnings form the business.

12. Other Forms of Ownership  Specialized Partnerships and Corporations  Limited Liability Partnership – Identifies some investors who cannot lose more than the amount of their investment, but they are not allowed to participate in the day-to-day management of the business.  Joint Venture – Unique business organized by two or more other businesses to operate for a limited time and for a specific project.  S-Corporation – Offers the limited liability of a corporation. Income is passed through to the owners based on their investment and is taxes on their individual tax returns.  Limited Liability Company (LLC) – Combines the best features of a partnership and a corporation. Provides liability protection for owners. Simpler set of organizing and operating requirements than a corporation. No articles of incorporation or bylaws. Simple document much like a partnership agreement must be developed.  Nonprofit Corporation – Group of people who join to do some activity that benefits the public. Free from corporate income taxes. Raise funds by receiving grants and donations from individuals and businesses. Must organize as a corporation.  Cooperatives and Franchises  Cooperative is owned by members, serves their needs and managed in their interest. Form a consumer cooperates so that they can purchase goods and services cheaper as a group than they could individually. Large numbers of small businesses will have greater bargaining power than the individual businesses.  Franchise – Written contract granting permission to operate a business to sell products and services in a set way. Franchiser – Grants the rights to another business. Franchisee – Company purchasing the rights to run the business.  Examples: Jiffy Lube, Century 21 and MAACO Collision Repair and Auto Painting.

13. 5-3 Organizational Structure for Businesses  Goals:  Understand important principles in designing an effective organization.  Compare alternative organizational structures for businesses.

14.  Designing an Effective Business Organization  Many new business fail in the first few years.  Business needs to be well organized to help people do their work properly.  Setting Direction: From top down  Mission Statement is a short, specific written statement of the reason a business exists and what it wants to achieve.  A Goal is a precise statement of the results the business expects to achieve. Used to define what needs to be accomplished and to determine if the business is successful. Written after the Mission Statement.  Policies which are guidelines used in making consistent decisions.  Procedures which are descriptions of the way work is to be done.  Principles of Effective Organization  Several principles guide the effective organization of work.  Responsibility – The obligation to complete specific work  Authority – The right to make decisions about how responsibilities should be accomplished.  Accountability – Taking responsibility for the results achieved.  With every job assignment, managers and employees have a set of responsibility as part of their job, authority to make the correct decisions and the accountability (positive and negative) for their job.  Unity of Command – Clear reporting relationship for all staff of a business. People need to know who is the leader and how decision will be made.  Span of Control – The number of employees who are assigned to a particular work task and manager. Organizations need to make sure that workers have a balance of supervision and freedom to do their work.

15.  Types of Organizational Structures  As more people are hired, will need a structure.  Organizational Chart – Diagram that shows the structure of an organization, classifications of work and jobs, and the relationships among those classifications.  Functional Organization Structure – Work is arranged within main business functions such as production, operations, marketing, and human resources. All the people with jobs related to one of the functions will work together.  Advantage is that people work with others who have the same skills. Disadvantage, people become focused on their specific function than on the success of the whole business.  Matrix Organization Structure – Work is structured around specific projects, products, or customer groups.  People with varied backgrounds are assigned together because their expertise is required for the project or to serve the customer. Can be interesting and motivating to employees. They work with many different people. They are focused on a specific project or task. Can be confusing and inefficient without effective leadership and communication.