Chapter 8
Business Organizations
Types of Organizations
Business Organization –
establishment formed to
carry on commercial
enterprise
 Three Types
•Sole Proprietorship
•Partnerships
•Corporations

Sole Proprietorships

A business owned and
managed by a single
individual
(most common type of business but only
Produce 6% of sales in US)
Advantages of Sole Proprietorships
 Easy to Start-Up
•Very little paperwork and legal
expense
•Minimal requirements
Authorization – must obtain a
business license
Site Permit – permission to
use a building
Pick a business name
Advantages of Sole Proprietorships

Relatively Few Regulations
•Sole proprietorships are the
least regulated businesses
•Major regulation is the city
zoning laws – city determines
what areas will accommodate
each kind of building
Advantages of Sole Proprietorships



Sole Receiver
of Profit
Full Control
Easy to
Discontinue
It’s all
mine!
Disadvantages of Sole
Proprietorships
Unlimited
I’ve lost
Personal Liability
everything!
 Limited Access
to Resources
 Lack of
Permanence

Partnerships

A business organization
owned by two or more
persons who agree on a
specific division of
responsibilities and profits
(about 7% of all business are partnerships but they only produce about 5% of sales in US)
Three Kinds of Partnership

General Partnership – Equal
share of responsibility and
liability among partners
•Examples include doctors,
lawyers, accountants
Three Kinds of Partnership

Limited Partnership – one
partner has unlimited
personal liability, others
contribute money
Three Kinds of Partnership

Limited Liability Partnership
(LLP) – all partners are
limited from personal liability
•States must grant
permission to be an LLP –
usually for doctors, lawyers,
and dentists
Advantages of Partnerships

Easy to Start
•Articles of
Partnership –
legal agreement
of how to share
profits and losses
Advantages of Partnerships

Easy to Start
•Without articles
of partnership,
the business falls
under the
Uniform
Partnership Act
Advantages of Partnerships



Shared Decision
Making and
Specialization
Large Pool of
Capital
Taxation – no
special taxes on
the business
Disadvantages of Partnerships
:-@!
Unlimited
Liability
(except with
an LLP)
 Potential for
Conflict

;~[
Corporations, Mergers,
Multinationals

Large entity owned by
individual stockholders who
all share limited liability for
the firm’s debts
(20% of all business are corporations but they account
for 90% of the sales in the US)
•Stock – also called shares –
a portion of ownership in a
corporation
Corporations

Corporations
are a separate
legal entity
from the
stockholders
who own it –
so they’re
taxed twice!
Two Types of Corporations

Closely-Held
Corporations –
majority of
stock is passed
down through
the family
(also called Privately held corporation)
Two Types of Corporations

Publicly Held
Corporations –
many
shareholders
buying stock
on the open
market
Corporate Structure
Stockholders
Elect
Board of Directors
CEO
COO
Managers
Other Employees
Advantages of Incorporation

Advantages to
the investor:
•Limited
liability
•Shares are
transferable
Advantages of Incorporation

Advantages to the
corporation
•Higher potential
for growth
•Long lasting
•Nearly unlimited
capital
 Selling bonds
Disadvantages of Incorporation
Difficulty and
Expense of
Start-Up
 Double
Taxation
 Loss of Control
 High
Regulations

Combining Corporations - Mergers

Horizontal Mergers – join two
or more firms competing in
the same market
+
Combining Corporations - Mergers

Vertical Mergers – join two or more
firms involved in different stages of
producing the same good
+
Combining Corporations Conglomerates

Firms that buy other
companies that produce
totally unrelated goods
GE
GE Insurance
NBC
GE Plastics
Multinationals
Corporations that operate in
more than one country at a
time
 They must pay taxes and
obey the laws of each country
they operate in
 Many have bigger budgets
than the country they are in

Business Franchises

Semiindependent
business that
pays fees to
a parent
company
Business Franchises

In return for the
fees, the
business gets
exclusive rights
to sell the parent
company’s
product in a
certain area
Advantages of Opening a
Franchise
Management Training
 Standardized Quality
 National Advertising Program

I’m the same
everywhere!
Advantages of Opening a
Franchise
 Financial Assistance
 Centralized Buying Power –
the parent company buys in
bulk to save everyone money
Disadvantages of Opening a
Franchise
High Franchising Fees –
parent company gets a share
of the profit called a royalty
 Strict Operating Standards

Disadvantages of Opening a
Franchise
Purchasing Restrictions
 Limited Product Line

Cooperative Organizations

A business organization
owned and operated by a
group of individuals for their
shared benefit
Three Kinds of Co-op’s

Consumer Cooperatives – sell
merchandise to members at
reduced prices
•Often require members to
work or pay a membership
fee
Three Kinds of Co-op’s
Service Cooperatives – same
as consumer co-op, but it
provides a service
 Producer Cooperatives –
agricultural co-ops that help
farmers sell their product

Nonprofit Organizations
Do not work for profit, but
rather to help people
 Exempt from income taxes

Nonprofit Organizations
Professional Organizations –
improve the image, working
condition, and skill level of
people in a profession
 Business Association –
promote the business
interests of a geographical
area (like a city or a state)

Nonprofit Organizations
Trade Associations – promote
the interest of an industry
 Labor Unions – organized
group of workers that aim to
improve conditions, hours,
and wages
