Chapter 3 Business Organizations Chapter EQ 3

Chapter 3 Business Organizations

Chapter EQ 3 -1 EQ: What are the characteristics each of the 3 forms of business organizations? 3 -2 EQ: How can reinvestment help with a company’s economic growth? 3 -3 EQ: What is a non profit organization? Give an example.

3 -1 Forms of Business Organizations

I. Sole Proprietorships 1. A business run by one person i. Smallest type of business organization in size ii. Typically the most numerous and profitable

A. Advantages: i. Easy to start up ii. Easy to manage iii. Owner gets all the profit iv. The business does not pay taxes, only the owner does v. Easy to close the business

B. Disadvantages i. The owner has unlimited liability ii. Difficult to raise financial capital iii. Owner may not be able to hire as many workers necessary to reach maximum efficiency iv. Difficult to attract employees v. Owner may have limited managerial experience

Individual Question n Why do you think that so many business owners are sole proprietors despite the fact that they hold unlimited liability? n Because the benefits gained are greater then the cost incurred. This means that they think that the risks are worth the possible outcome/profit.

II. Partnerships 2. A partnership is a business jointly owned by two or more persons. i. It is the least numerous among businesses ii. It has the 2 nd smallest proportion of sales and net income

General partnerships are a type if business in which all partners are involved in the management and finances B. In a limited partnership, at least one partner is not involved in management C. Articles of the partnership document spell out how the partners divide up the profits or losses A.

D. Advantages i. Easy to start up ii. Ease of management iii. Easier to raise capital through bank loans or a new partner iv. Easier to attract skilled employees

E. Disadvantages i. Partners are responsible for the acts of each and every partner ii. Limited life of a partnership ends if a partner leaves iii. Potential for partner conflicts

III. Corporations 3. A corporation is a business organization recognized by law as a separate legal entity with all the rights of an individual i. They receive a charter to create a corp. which includes the details about stock ownership ii. Investors who buy stock in a corporation become owners of the firm

A. Advantages i. Ease of raising capital ii. Professionals may run the firm instead of the owners (shareholders) iii. Owners have limited liability iv. Business’s life is unlimited v. Easy to transfer ownership

B. Disadvantages i. A charter is expensive ii. Owners and managers are separate so shareholders have little say in running the business iii. Corporate income is taxed twice vi. Subject to government regulation

Discussion Question Who really are the owners of a corporation? The stockholders

3 -1 EQ What are the characteristics each of the 3 forms of business organizations? Sole Proprietorship Partnership Corporation

3 -2 Business Growth and Expansion

I. Growth through Reinvestment Business Revenue can be used to invest in factories, machinery or new technology. B. Before reinvesting, a business must estimate it’s cash flow Total Sale- (expenses + tax + depreciation)= net income A.

C. The depreciated value is added back to the net income to get the company’s cash flow (bottom line) which is the real measure of business profit. D. Business owners can then decide whether part or all of the cash flow should be reinvested to generate additional sales and increased profit

II. Growth through Mergers When firms merge, one gives up its separate legal identity. B. A company may merge to grow faster, become more efficient, acquire or deliver a better product, or change its image. C. A horizontal merger is the joining of firms that make the same product A. Example: AT&T and Cingular Wireless

D. A vertical merger is the joining of firms involved in different stages of manufacturing or marketing E. A conglomerate is composed of four or more businesses each making unrelated products, none of which is responsible for a majority of it’s sales F. A multinational is a corporation with manufacturing and service operations in several countries, which are subjected to each nation's business regulations.

Discussion Question n Why have some multinational companies been criticized? n Paying low wages to workers n Exporting scarce natural resources n Driving out local business

3 -2 EQ n How can reinvestment help with a company’s economic growth? n Reinvesting in new technology can lead to economic growth, as can reinvesting in labor and human capital. Increased productivity= economic growth and higher profits

3 -3 Other Organizations

I. Community and Civic Organizations A non-profit organization is in business to promote its members collective interests, not to seek financial gain. B. Many non-profit organizations incorporate to take advantage of a corporation’s unlimited life and limited liability. C. If it has money after it’s expenses are paid, its board of directors may apply the surplus to other projects that further the organization’ s mission A.

II. Cooperatives A. B. C. D. A cooperative is a voluntary association of people who carry on an economic activity that benefits members. Consumer cooperatives buy food and other necessities in bulk. Members donate time to the co-op and members pay lower prices for goods. Service co-ops such as credit unions, offer services to their members at lower rates. Producer co-ops help members, such as farmers, promote or sell their products

III. Labor, Professional, and Business Organizations Labor unions represent workers’ interests and negotiate with management through collective bargaining. B. Professional Associations set standards for those in the profession an influence govt. policies on issues concerning their member’s interests. C. Business Associations are industries or trade associations that represent specific kinds of businesses. Some also help to protect the consumer. A.

IV. Government A. The Government plays a direct role in the economy when its agencies produce and distribute goods and services to consumers.

B. Govt. corporations have board of directors, but Congress’s money rather than investor’s money, support their work. C. The govt. plays an indirect role when it regulate public utilities or when it grants money to people in the form of social security and student financial aid.

3 -3 EQ n What is a non profit organization. Give an example. n. A non-profit organization operates in a businesslike way to promote the collective interests of its members rather than to seek financial gain for it’s owners n Examples: schools, churches, hospitals etc.