CHAPTER 3: BUSINESS
ORGANIZATIONS
Section One: Forms of Business Organization
I. Forming a Proprietorship
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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
Proprietorship Advantages
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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
Proprietary Disadvantages
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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
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Difficult to raise capital
 Personal
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financial resources are limited
Size and efficiency: Inventory is any unused stock
of finished goods/parts in reserve
Proprietary Disadvantages
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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
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Limited lifespan: The firm legally ceases to exist
when the owner dies, quits, or sells the business
II. Partnerships
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Owned by 2 or more persons
Least numerous business organization
Smallest proportion of sales and net income
Types of Partnerships
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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
Forming a Partnership
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Relatively easy to start
Articles of Partnership: Formal legal papers which
specify arrangements between partners
Advantages of Partnerships
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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
Advantages of Partnerships
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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
Disadvantages of Partnerships
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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
Disadvantages of Partnerships
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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?”
III. Corporations
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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 be sued
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Account for 1/5 of the firms in the US
Account for 90% of all sales
Ex:
http://www.timewarner.com/corp/businesses/in
dex.html
Forming a Corporation
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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
Forming a Corporation, continued
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Shares of stock are sold to
investors called…
stockholders, or
shareholders.
$$ is then used to set-up
corporation (remember
“Tucker” DVD)
A check, or dividend, is paid
to shareholders if the
corporation is profitable
Corporate Structure: Common Stock
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Investors become owners with certain ownership rights,
depending on type of stock purchased:
Common Stock: Basic ownership of corporation
 Owner
usually receives 1 vote for each share of stock
 Used to elect board of directors who direct the corporation’s
business by setting policies/goals
 The Board hires a professional management team to run the
business on a daily basis
Common Stock
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The dividend is variable
and common stock
shareholders are the
last to receive a
dividend or get their $$
back if corporation fails.
Preferred Stock
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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!
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Preferred stockholders cannot elect the board of
directors-THEY CANNOT VOTE!!
Advantages of the Corporation
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Ease of raising financial capital
Need more capital?
 Sell
additional stock
 Borrow $$ by issuing bonds: Written promise to repay
the amount borrowed at a later date
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Principal: Amount borrowed to be repaid later
Interest: The price paid by the corporation for the
use of another’s $$
Advantages of the Corporation
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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
Advantages of the Corporation
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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
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Ease of transferring ownership: If a shareholder
no longer wants to be an owner, they can sell the
stock
Disadvantages of the Corporation
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Difficult to get a charter
 Depending
on the state, attorneys’ fees and filing
expense can cost several thousand $$
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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
Disadvantages of the Corporation
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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
Government and Business
Regulation
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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
Government and Business
Regulation
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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/