Types of Business Organizations

1. Types of Business Organizations

2. Chapter 8: Types of Business Organizations KEY CONCEPT • Most of the producers in a market economy are business organizations, commercial or industrial enterprises and the people who work in them. The purpose of most business organizations is to earn a profit. WHY THE CONCEPT MATTERS • Businesses vary in size and are organized differently. The American free enterprise system allows producers to choose the kind of business organization that best suits their purpose.

3. Section-1 Sole Proprietorships The Characteristics of Sole Proprietorships KEY CONCEPTS • Business organizations—produce goods, provide services — purpose of most is to earn profit — supply most products in market economy; provide jobs, income; pay taxes • Sole proprietorship—owned and managed by single person — Make up 70 percent of U.S. businesses, but generate only 5 percent of all sales

4. The Characteristics of Sole Proprietorships EXAMPLE: Bart’s Cosmic Comics • Steps Bart followed to set up and run a new business — raised funds to rent space, stock store through savings, loans — obtained licenses, site permit; registered name — ran advertisements, promotions to get customers — paid back loans; began earning profit; expanded

5. Sole Proprietorships: Advantages and Disadvantages KEY CONCEPTS • Not governed by as many regulations as other types of businesses • Have limited life—close if owner dies, retire, or leaves business • Owners have unlimited liability—responsible for all losses, debts

6. Sole Proprietorships: Advantages and Disadvantages Advantages: Sole Proprietorships • Easy to open or close as long as owner settles all bills • Must meet few regulations; possibly zoning, labor laws for employees • Owner makes own decisions, controls business; personal satisfaction • Owner keeps all profits

7. Sole Proprietorships: Advantages and Disadvantages Disadvantages: Sole Proprietorships • Have limited funds, especially at start-up • Have limited life • Have unlimited liability—owner personally responsible for all debts

8. Mary Kay Ash: Going It Alone Building a Business • Ash decided to create business that would reward working women • Mary Kay, Inc. sells cosmetics, other products at in-home parties • In first year, 1964, sales exceeded $198,000 • Incentives to consultants include pink Cadillacs, diamond jewelry • In 2005, 1.6 million consultants in 30 countries had $2 billion sales

9. Reviewing Key Concepts Explain the relationship between the terms in each of these pairs: • business organization and sole proprietorship • limited life and unlimited liability

10. Section-2 Forms of Partnerships The Characteristics of Sole Proprietorships KEY CONCEPTS • Partnership—business co-owned by two or more people — partners agree on division of responsibilities, profits, and losses • Found in all areas of business — very common in professional and financial services

11. The Characteristics of Sole Proprietorships Type 1: General Partnerships • General partnership—most common type • Partners share responsibilities, profits, debts, losses equally — partnership agreement can specify otherwise

12. The Characteristics of Sole Proprietorships Type 2: Limited Partnerships • Limited partnership—at least one limited partner — not involved in running business — liable only for funds he or she invested • Must have general partner who runs business, is liable for all debts — money for business comes from limited partners

13. The Characteristics of Sole Proprietorships Type 3: Limited Liability Partnerships • Limited liability partnership (LLP)—all partners are limited — not responsible for liabilities of other partners • Not all businesses can register as LLPs — only those in which malpractice can be an issue

14. Partnerships: Advantages and Disadvantages KEY CONCEPTS • Advantages, disadvantages similar to those of sole proprietorships • Some differences because owners work together

15. Partnerships: Advantages and Disadvantages Advantages: Partnerships • Easy to start up and dissolve • Few regulations: legal agreement; Uniform Partnership Act (UPA) • More funds means easier to get loans, attract employees • Joint decision making: partners bring different perspectives • Partners can specialize, promoting efficiency

16. Partnerships: Advantages and Disadvantages Disadvantages: Partnerships • Unlimited liability — partners risk personal savings and property to cover debts • Potential for conflict if many partners must agree on decisions • Limited life—if partner leaves or joins new agreement must be drawn

17. Reviewing Key Concepts Explain the relationship between the terms in each of these pairs: • partnership and general partnership • limited partnership and limited liability partnership

18. Section-3 Corporations, Mergers, and Multinationals Characteristics of Corporations KEY CONCEPTS • Corporation—stockholders have rights to profit, limited liability • Stock—shares of ownership in a corporation • Dividend—part of a corporation’s profit paid out to stockholders • Public company—issues stock that can be freely bought and sold • Private company—controls who can buy or sell its stock

19. Characteristics of Corporations EXAMPLE: F & S Publishing, Inc. • F & S owners have no personal liability; only assets of business at risk • Owners hire lawyers to file legal documents to incorporate • State government grants corporate charter: — registers name, address, purpose; specifies amount of stock can sell • Stockholders elect board of directors which hires corporate officers

20. Corporations: Advantages and Disadvantages KEY CONCEPTS • Bond—contract issued by corporation — promises to repay borrowed money, plus interest on fixed schedule • Limited liability—owner’s liability for debts and losses is limited • Unlimited life—corporation continues to exist even if owners change

21. Corporations: Advantages and Disadvantages Advantages: Corporations • Can raise money in various ways: — borrowing from banks, selling more stock, issuing bonds • Professional managers likely to produce higher profits • Limited liability—stockholders, directors, officers protected • Unlimited life—business operates as before if stockholders change

22. Corporations: Advantages and Disadvantages Disadvantages: Corporations • Starting up: time-consuming, difficult, expensive; paperwork, lawyers • Heavy regulation, specially for public companies — annual SEC reports, quarterly financial reports, stockholder meetings • Both profits and dividends taxed; some small corporations excluded • Decisions made by board; founders must give up some control

23. Business Consolidation KEY CONCEPTS • To increase efficiency, gain new identity, keep rivals out, diversify • Horizontal merger—joins companies with same or similar product • Vertical merger—joins different steps of production, marketing • Conglomerate—combines companies with unrelated products • Multinational corporation—has branches in several countries

24. Business Consolidation Mergers • In 2005, Reebok and Adidas made horizontal merger — meant to cut production, distribution costs by combining operations — purpose to undersell and take customers from Nike • In 1990s, Shell and Texaco made vertical merger — Shell had more refineries; Texaco more gas stations for distribution

25. Business Consolidation Conglomerates • Theory: diversified businesses protect parent company • Practice: difficult to manage unrelated companies • 1960s Gulf and Western in communications, clothes, mines, food — eventually sold all except entertainment, publishing; became Viacom

26. Business Consolidation Multinational Corporations • Multinational, or transnational, corporations increase globalization • Benefits: provide jobs, products; spread technology; pay taxes — help raise standard of living of poor countries • In countries with lax regulations, factories may cause problems — pollution, long work hours, unsafe conditions

27. Bill Gates: Entrepreneur and Corporate Leader Microsoft Corporation • With Paul Allen, developed BASIC language for personal computers • In 1975, they founded Microsoft to provide software for early PCs • Microsoft began providing operating system for IBM PCs • In 1985, released Windows, which became world’s most popular operating system • In 1994, Gates founded charitable foundation for health, education

28. Reviewing Key Concepts Explain the relationship between the terms in each of these pairs: • stock and bond • public company and private company • merger and conglomerate

29. Section-4 Franchises, Co-ops, and Nonprofits Franchises KEY CONCEPTS • Franchise—business that licenses the right to sell its products • Franchisee—pays fee to parent company to sell in a particular area • Fast-food restaurants are most common type of franchise

30. Franchises EXAMPLE: An Almost Independent Business • After working as assistant manager, Tim wants to run own restaurant • Concerns: lacks enough experience, start-up funds • Likes organic juice and sandwich franchise; decides to apply

31. Franchises Advantages: Franchises • High level of independence • Franchiser provides training in running the business • Franchiser provides products and other materials at low cost • Franchiser pays for national and regional advertising

32. Franchises Disadvantages: Franchises • Franchisee must invest own money to start business • Must share some of the profits with franchiser • Does not have full control of business — must buy only franchiser’s materials — must sell only franchiser’s products

33. Cooperatives and Nonprofits KEY CONCEPTS • Some businesses are not created to make a profit • Cooperative—operated for shared benefit of owners, who are customers • Nonprofit organization—acts like business but purpose is to benefit society

34. Cooperatives and Nonprofits A Business Organization for Its Members • Consumer co-ops keep prices low by purchasing in large volume — members pay fee or provide labor as payment • Service co-ops, such as credit unions, provide services at low cost • Producer co-ops ensure cheaper, more efficient processing or marketing

35. Cooperatives and Nonprofits A Purpose Other Than Profit • Purpose of many nonprofits is benefiting society — include charities, professional associations, labor unions, museums • Receive government charter; have unlimited life • Raise money from donations, grants, membership fees — some sell services, products to raise funds to support their mission • Other nonprofits are professional organizations — include professional associations, labor unions

36. Reviewing Key Concepts Give an example of each of the following terms: • franchise • cooperative • nonprofit organization

37. Apple: The Evolution of One Company Background • As students, Steve Jobs and Steve Wozniak created a personal computer, and in 1976 formed Apple Computer, Inc. Through the years, Apple overcame problems and earned almost $14 billion in revenues in 2005. What’s the Issue? • How does a company evolve from an idea into a billion-dollar enterprise?

38. Apple: The Evolution of One Company {continued} Thinking Economically • Based on information in the documents, how would you describe the evolution of Apple Computer, Inc.? • How did Apple’s advertising and marketing affect its success or failure? Use examples from the documents in your answer. • What single overriding concern has defined the evolution of Apple and determined its success? Use information from the documents to support your answer.

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