CH 9 Business Organizations 1 2 3 Sole

CH. 9: Business Organizations 1. 2. 3. Sole Proprietorships Partnerships Corporations and Franchises

ENTREPRENEUR: • Person willing to take the risk and start a business

SOLE PROPRIETORSHIP • Owned and controlled by a single individual : “Proprietor” = OWNER of PROPERTY • Most basic type • Most common – Only 5% of sales – But 70% of businesses • Most small, local businesses

ADVANTAGES of SOLE PROPRIETORSHIP • • • Less complicated (easy to form / dissolve) Easy decision-making (owner “calls the shots”) Direct communication with employees Fewer government regulations Owner gets all the profits & pride (high incentive) --makes all decisions --quick • NO DOUBLE TAXATION: Personal income taxes often lower than corp. taxes • Lenders are more willing to extend credit because of UNLIMITED LIABILITY of sole owner

KEY TERMS: • ASSETS: What you OWN! • LIABILITIES: What you OWE!

DISADVANTAGES of SOLE PROPRIETORSHIP • Borrowing large amounts = harder because of limited assets • Small budget limits variety and diversity of products • UNLIMITED LIABILITY • • complete legal responsibility for all debts and damages lose house, car, savings, etc. , as well as business (personal as well as business ASSETS) …THUS, HIGH INSURANCE COSTS! • Owner has to make all the decisions even in areas which are out of his expertise • Demanding & time consuming • Business closes if owner dies, goes bankrupt, or is unwilling or unable to work

PARTNERSHIP • A business that two or more individuals own and operate • Account for – 5% of annual sales – 15% of businesses

ADVANTAGES of PARTNERSHIPS • More human & financial resources – Greater efficiency with each partner working in his area of expertise – Combines CAPITAL of two or more, thus, makes more $ available to operate a larger business – Creditors may be willing to lend more money because risk is shared • PRIDE in ownership: all profit & pride belongs to the FEW partners (high incentive) • Losses are shared • NO DOUBLE TAXATION: Personal income taxes may be lower than corporate taxes

DISADVANTAGES of PARTNERSHIPS • More difficult to form & dissolve • Communication between owners & employees isn’t as direct • Slower decision making (consensus); disagreements lead to problems • Borrowing large amounts = harder because of limited assets • Must SHARE PROFITS • UNLIMITED LIABILITY (responsible if partner can’t pay and responsible for partners’ acts!) --complete legal responsibility for all debts and damages --lose house, car, savings, etc. , as well as business (personal as well as business ASSETS) • Business closes if one partner dies, leaves, or is unwilling or unable to work (uncertainty = risk for creditor)

LIMITED PARTNERSHIP • Special form of partnership • GENERAL PARTNER: --manages firm --has full responsibility for firm’s debt • LIMITED PARTNER: --supplies money or property --has no voice in management • Certificate of Partnership: (minimum info) co. name, nature of business, principal place of business, names and addresses of each partner, how long partnership will last, amount contributed by each partner

JOINT VENTURE • A temporary partnership • Set up for a specific purpose • For a short period of time

CORPORATION • An organization owned by stockholders • Account for – 90% of all sales (large economic impact!) – 15% of businesses (relatively few) • Treated as a PERSON under the LAW (a separate legal entity; it can – – Own property Pay taxes Make contracts Sue and be sued

ADVANTAGES of CORPORATIONS • Access to the most financial resources due to sale of STOCKS & BONDS, thus can develop diversified product line • LIMITED LIABILITY: The corp. , not its stockholders, is responsible for its debts. Creditors cannot take stockholders’ personal property; stockholder can lose only what he’s got in the stock • MANAGEMENT = divided among trained personnel; allows for large & complex operations • PRIDE in ownership of stock • FINANCING GROWTH: issue stock to raise CAPITAL • PERPETUAL EXISTENCE: Corp. can continue as long as profitable; not affected by death of stockholders

DISADVANTAGES of CORPORATIONS • DECISION MAKING can be slow and complicated (Board of Directors must vote) • PRINCIPAL-AGENT PROBLEM: management’s interests and the STOCKHOLDERS’ interests aren’t always the same • PROFIT IS DOUBLE TAXED: – CORPORATE PROFIT TAX: Federal gov’t and some state & local govt’s tax corporate profits; CORP. “INCOME TAX” – Profits paid to stockholders as DIVIDENDS are taxes again as income • Some states tax CORPORATE PROPERTY • Owners (STOCKHOLDERS) have little say in how the corporation is run

ARTICLES of INCORPORTATION • Filed with STATE in order to obtain a CORPORATE CHARTER (a license to operate from that state) • Includes: – Name, address, & purpose of corp. – Names & addresses of bd. of directors – Number of shares of stock to be issued – Amount of money capital to be raised through issuing stock

FRANCHISE • A contract in which a FRANCHISOR sells to another business (FRANCHISEE) the right to --use its name (and advertising) --sell its products --use its business model & methods or training program • FRANCHISEE pays fee which may include a percentage of all $$$ taken in • EX. : Mc. Donalds & Mc. Allister’s Deli

MERGERS • Occur when 2 or more businesses unite under the same ownership • One can buy the other or they can simply combine • 3 categories: – HORIZONTAL MERGERS – VERTICAL MERGERS – CONGLOMERATE MERGERS

3 Categories of MERGERS: • HORIZONTAL MERGER: – 2 companies at the same stage of production join; eliminates competition – Mc. Donalds & Burger King – VERTICAL MERGER: – 2 companies at different stages of production of the same product merge – Mc. Donalds and a meat processing company • CONGLOMERATE MERGER – 2 totally UNRELATED companies merge

Celler-Kefauver Act

INFO. on STOCKS • Types • Benefits and risks • Primary and Secondary Markets COMING SOON !!! We’ll cover these when we talk about FINANCING A BUSINESS!