CHAPTER 3: BUSINESS ORGANIZATIONS

1. CHAPTER 3: BUSINESS ORGANIZATIONS Section One: Forms of Business Organization

2. I. Forming a Proprietorship • Easiest form of business to start-needs only the occasional licenses and fees • Ease of start up • Relative ease of management • Decisions can be made quickly

3. Proprietorship Advantages • Owner enjoys the PROFITS of successful management without having to share • No separate business income taxes • Not recognized as a separate legal entity • Owner must pay individual income taxes on profits • Business is exempt from any tax on the income • Psychological satisfaction • Easy to get out of business

4. Proprietary Disadvantages • Unlimited liability • Owner is personally and fully responsible for all loses and debts of the business • If business fails, the owner’s personal possessions may be taken away to satisfy business debts • Difficult to raise capital • Personal financial resources are limited • Size and efficiency: Inventory is any unused stock of finished goods/parts in reserve

5. Proprietary Disadvantages • Limited Managerial Skills • Difficulty of attracting qualified employees • Fringe benefits- Employee benefits such as vacation, sick leave, retirement, medical, and health insurance may not be available • Limited lifespan: The firm legally ceases to exist when the owner dies, quits, or sells the business

6. II. Partnerships • Owned by 2 or more persons • Least numerous business organization • Smallest proportion of sales and net income

7. Types of Partnerships • General Partnership: All partners are responsible for the management and financial obligations of the business. • Limited Partnership: At least one partner is not active in the daily running of the business, although he or she may have contributed funds to finance the operation • Ex. www.evangelinecafe.com

8. Forming a Partnership Relatively easy to start Articles of Partnership: Formal legal papers which specify arrangements between partners

9. Advantages of Partnerships Ease of start up. Articles of Partnership involves attorney fees and filing fee for the state. Ease of management: Each partner usually brings different areas of expertise to the business. Lack of special taxes: Partners draw profits from the firm and then pay individual income taxes at the end of the year

10. Advantages of Partnerships Usually attract financial capital more easily than a sole proprietorship Slightly larger size = greater efficiency Lawyers, doctors, accountants Usually attract top talent to their organizations

11. Disadvantages of Partnerships Unlimited Liability: Each partner is fully responsible for the acts of all partners Limited Partnership: The limited partner has limited liability Investor’s responsibility for the debts of the business is limited by the size of their investment in the firm If business fails with a large debt, the limited partner (investor) only loses their original investment, leaving the general partners to make up the rest

12. Disadvantages of Partnerships • Limited Life: When a partner leaves or dies, the partnership must be dissolved and reorganized. • The new partner may try to keep an agreement to keep its name • Potential for Conflict: “Why can’t we all just get along?”

13. III. Corporations Defn: A form of business organization recognized by law a a separate legal entity having all as an individual. Can buy & sell property Enter into legal contracts and sue and besued Account for 1/5 of the firms in the US Account for 90% of all sales Ex: http://www.timewarner.com/corp/businesses/index.html

14. Forming a Corporation Very formal and legal arrangement Incorporation (or forming a corporation) must file for permission from the state where business will have be headquartered Charter: A government document that gives permission to create a corporation if approved States the company name, address, purpose of business, and the number of shares of stock, or ownership certificates, within the firm

15. Forming a Corporation, continued Shares of stock are sold to investors called… stockholders, or shareholders. $$ is then used to set-up corporation (remember “Tucker” DVD) A check, or dividend, is paid to shareholders if the corporation is profitable

16. Corporate Structure: Common Stock Investors become owners with certain ownership rights, depending on type of stock purchased: Common Stock: Basic ownership of corporation Owner usually receives 1 vote for each share of stock Used to elect board of directors who direct the corporation’s business by setting policies/goals The Board hires a professional management team to run the business on a daily basis

17. Common Stock The dividend is variable and common stock shareholders are the last to receive a dividend or get their $$ back if corporation fails.

18. Preferred Stock Nonvoting ownership shares of a corporation These shareholders receive dividends first and they are fixed If there are funds or property left after a business fails, preferred stockholders get their investment back first! Preferred stockholders cannot elect the board of directors-THEY CANNOT VOTE!!

19. Advantages of the Corporation Ease of raising financial capital Need more capital? Sell additional stock Borrow $$ by issuing bonds: Written promise to repay the amount borrowed at a later date Principal: Amount borrowed to be repaid later Interest: The price paid by the corporation for the use of another’s $$

20. Advantages of the Corporation Ease of finding professional managers Limited liability for its owners Corporation is fully responsible for its debts and obligations **Because limited liability is so attractive, many firms incorporate just to take advantage of it

21. Advantages of the Corporation Unlimited life: Corporation continues to exist even when ownership changes Because the corporation is a legal entity, the name of the company remains the same, and the corporation continues to do business Ease of transferring ownership: If a shareholder no longer wants to be an owner, they can sell the stock

22. Disadvantages of the Corporation Difficult to get a charter Depending on the state, attorneys’ fees and filing expense can cost several thousand $$ Owners/shareholders have little say in business affairs after voting for board of directors Double Taxation: Corporate profits Stockholders’ dividends are taxed twice: once as corporate profit and again as personal income

23. Disadvantages of the Corporation Lots of Government regulation: Register with state where the Corp. is chartered To sell stock to the public, the Corp. must register with the Securities and Exchange Commission Provide detailed financial statements on regular basis to the general public When taking over another business, the Corp may require federal approval

24. Government and Business Regulation Business Regulation: In the 20th century, various consumer groups demanded regulation of giant corporations. Federal and state governments responded by passing stronger regulations. Rigorous regulations for banks, insurance companies, electricity, telephone, and transportation Ex?, Sherman and Clayton Anti-trust Acts, FDIC, Federal Reserve, FCC, Dept. of Transportation

25. Government and Business Regulation Business Development: States try to attract new industry. Offer tax credit or a reduction in taxes for a business to move to a state Examples in TX? www.governor.state.tx.us/ecodev/