Types of Business Organizations
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Chapter 8: Types of Business Organizations
KEY CONCEPT
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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
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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.
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Sole Proprietorships
The Characteristics of Sole Proprietorships
KEY CONCEPTS
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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
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The Characteristics of Sole Proprietorships
EXAMPLE: Bart’s Cosmic Comics
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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
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Sole Proprietorships: Advantages and
Disadvantages
KEY CONCEPTS
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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
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Sole Proprietorships: Advantages and
Disadvantages
Advantages: Sole Proprietorships
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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
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Sole Proprietorships: Advantages and
Disadvantages
Disadvantages: Sole Proprietorships
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Have limited funds, especially at start-up
Have limited life
Have unlimited liability—owner personally responsible for all debts
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Mary Kay Ash: Going It Alone
Building a Business
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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
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Reviewing Key Concepts
Explain the relationship between the terms in each of
these pairs:
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business organization and sole proprietorship
limited life and unlimited liability
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Forms of Partnerships
The Characteristics of Partnerships
KEY CONCEPTS
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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
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The Characteristics of Partnerships
Type 1: General Partnerships
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General partnership—most common type
Partners share responsibilities, profits, debts, losses equally
– partnership agreement can specify otherwise
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The Characteristics of Partnerships
Type 2: Limited Partnerships
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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
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The Characteristics of Partnerships
Type 3: Limited Liability Partnerships
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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
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Partnerships: Advantages and Disadvantages
KEY CONCEPTS
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Advantages, disadvantages similar to those of sole proprietorships
Some differences because owners work together
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Partnerships: Advantages and Disadvantages
Advantages: Partnerships
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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
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Partnerships: Advantages and Disadvantages
Disadvantages: Partnerships
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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
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Reviewing Key Concepts
Explain the relationship between the terms in each of
these pairs:
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partnership and general partnership
limited partnership and limited liability partnership
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Corporations, Mergers, and
Multinationals
Characteristics of Corporations
KEY CONCEPTS
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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
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Characteristics of Corporations
EXAMPLE: F & S Publishing, Inc.
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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
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Corporations: Advantages and Disadvantages
KEY CONCEPTS
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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
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Corporations: Advantages and Disadvantages
Advantages: Corporations
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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
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Corporations: Advantages and Disadvantages
Disadvantages: Corporations
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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
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Business Consolidation
KEY CONCEPTS
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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
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Business Consolidation
Mergers
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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
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Business Consolidation
Conglomerates
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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
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Business Consolidation
Multinational Corporations
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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
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Bill Gates: Entrepreneur and Corporate
Leader
Microsoft Corporation
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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
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Reviewing Key Concepts
Explain the relationship between the terms in each of
these pairs:
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stock and bond
public company and private company
merger and conglomerate
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Franchises, Co-ops, and Nonprofits
Franchises
KEY CONCEPTS
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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
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Franchises
EXAMPLE: An Almost Independent Business
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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
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Franchises
Advantages: Franchises
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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
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Franchises
Disadvantages: Franchises
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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
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Cooperatives and Nonprofits
KEY CONCEPTS
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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
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Cooperatives and Nonprofits
A Business Organization for Its Members
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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
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Cooperatives and Nonprofits
A Purpose Other Than Profit
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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
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Reviewing Key Concepts
Give an example of each of the following terms:
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franchise
cooperative
nonprofit organization
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Apple: The Evolution of One Company
Background
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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?
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How does a company evolve from an idea into a billion-dollar
enterprise?
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Apple: The Evolution of One Company
{continued}
Thinking Economically
1. Based on information in the documents, how would you describe the
evolution of Apple Computer, Inc.?
2. How did Apple’s advertising and marketing affect its success or
failure? Use examples from the documents in your answer.
3. 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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